Trading Options On Philip Morris

| About: Philip Morris (PM)

The tobacco sector has been good to investors in 2012, as most of the major companies in this sector have seen strong gains on a year-to-date basis. The tobacco sector is classified in the consumer goods sector and can be seen as a solid consumer defensive play. This year Altria Group, Inc. (NYSE:MO) has been one of my favorite stocks to trade options on, but for investors that want global exposure to the tobacco sector, Philip Morris International Inc. (NYSE:PM) has proven to investors that they will be rewarded over time, despite the concerns over the longevity of tobacco. In terms of market capitalization, Philip Morris is among the largest with over a $150-billion market capitalization and is a company concentrated in over 180 countries across the world.

When investing companies that compete on a global scale, there are many considerations that investors must consider, as global economic concerns can cause headaches for investors. Luckily for tobacco companies, they sell a product that still has strong demand, despite consumption rates declining. Philip Morris' last quarterly earnings results were flat, but with the global exposure that Philip Morris has, it was able to offset costs in regions that were down. Philip Morris operates in four major segments comprising the European Union, Eastern Europe that includes Middle East and Africa, Asia, and Latin America & Canada. Shipping volume is a good indicator, since more cigarettes being shipped can lead to more demand. Overall, shipping volume was flat for Philip Morris last quarter, with the same quarter last year being up 1.8% compared to (-1.2%) for this quarter.

Looking forward, Philip Morris will be increasing annual earnings through 2014, and FY 2012 guidance will be in the range of $5.10-$5.20, with FY 2013 at $5.76, and FY 2014 at $6.38 With Philip Morris in the low 90s, the stock can viewed as fairly valued with a manageable debt to equity ratio that can be easily paid off with the company's increasing cash flow/share basis. Even though Philip Morris is fairly valued, here are some reasons to still be bullish on Philip Morris:

1) For shareholders, Philip Morris has a solid dividend of 3.39%, and since 2008, has increased its dividend. Philip Morris' yield and payout ratio is still lower than its peers in the tobacco sector. Philip Morris' next dividend declaration date is on September 12, 2012 and any news of a possible dividend increase could help drive shares higher.

2) Since June 5, 2012, Philip Morris has been stair-stepping upward and each pullback has been a buying opportunity. There has been no breakdown in this pattern and each buying opportunity has generated gains of over 5% (see chart below)

Chart forPhilip Morris International, Inc.

3) Despite the European Union region seeing slower sales the Eastern European Region, Africa and Middle East are gaining market share versus last year, as the business environment is more favorable for growth with less restrictions.

4) Upgrades in technological advances of tobacco products that include electronic cigarettes, snuff, chewing tobacco and lower-risk cigarettes have not yet made their mark in developing countries. As Philip Morris moves forward, I would look for it to continue to spend money on research and acquisitions, as alternative forms of tobacco is a growing market.

5) Tobacco has strong pricing power and I would expect prices to continue to slowly increase over the next five years as taxes per pack are likely to increase. Despite price increases, Philip Morris can still effectively manage the offset in higher cigarette prices versus declining tobacco consumption with effective cost control measures, brand recognition and focusing on alternative sources of revenue in emerging markets.

6) There are no current analyst sell recommendations at this time.

With Philip Morris already having a great run in 2012, investors may wonder how much more upside there is to Philip Morris in 2012. Philip Morris trades at 17x earnings, and with a stock that is fairly valued, placing a vertical call spread can be an effective option strategy for investors that are bullish, but want to manage their risk.

Trade Idea:

Buy (1) October 90 Call for $2.40 (2.40 x 100 = $240)

Sell (1) October 95 Call for $0.51 (0.51 x 100 = $51)

Total cost for trade $240 - 51 = $190

Breakeven Point = 90 + 1.90 = $91.90

Days till expiration = 52

Max Profit = Difference between strikes (95-90=5) -->(5 - 1.90 = 3.10) -->(3.10x100=$310)

In conclusion, I am bullish on tobacco stocks, as the sector always has many challenges, but keeps delivering solid results. For investors looking for an international powerhouse and want some more beta, Philip Morris is the way to go. If Philip Morris can maintain its bullish pattern, I would wait for a pullback and would want to be a buyer of vertical call spreads in order to bring down the cost and breakeven components of the trade. For investors that want to take more risk, I would consider the October $90 calls on a pullback in the stock and would want to be a buyer for under $2.00 Currently, I would exit this trade above $93, as the pattern could continue to repeat itself or stall out.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.