Philip Morris International: Still Has Plenty Of Puff

| About: Philip Morris (PM)
This article is now exclusive for PRO subscribers.


Philip Morris International has seen revenue drop since 2012, though this is somewhat misleading.

Its international presence is its greatest strength long term.

It is undervalued, and worthy of inclusion in a long-term portfolio.

When Philip Morris International, Inc. (NYSE:PM) was spun-off from Altria Group, Inc. (NYSE:MO) in March 2008, it retained the right to sell Marlboro cigarettes and other brands (e.g. Merit, Parliament, Virginia Slims) internationally, while Altria retained exclusive sales rights over the U.S. market.

The tobacco industry is seeing sales slowly decline, as more and more customers stop buying cigarettes due to the well-publicized health risks incurred from smoking. This situation seems bleak for Philip Morris, though the revenue and net income figures do not conclusively confirm the tale:

Year Revenue ($) Net Income ($)
2011 31.10 billion 8.59 billion
2012 31.38 billion 8.80 billion
2013 31.22 billion 8.58 billion
2014 29.77 billion 7.49 billion
2015 26.79 billion 6.87 billion

The figures do show a decline from 2012 on, but it is not a steep drop. It suggests a slow, steady decline. However, this is not due to a decline in smoking worldwide (the reason for the decline will come later). The figures obscure the key long-term advantage that Philip Morris International has which ensure that shareholders do not get burnt by this stock.

The fact that Philip Morris International has all non-US markets to focus on provides them with a significant advantage. Over 80% of smokers globally live in low-income and middle-income nations. Between 2005 and 2014, the Asia-Pacific region, the largest global cigarette market, grew from 54% to 65%. The Asian market will drive growth for Philip Morris International going forward, and the company is focused on increasing sales in Indonesia and the Philippines, while simultaneously expanding its presence in Bangladesh, China, India and Vietnam.

The more than 180 markets worldwide in which Philip Morris International sell their products, especially the industry-leading Marlboro brand, include countries which are seeing a rise in smoking (including China, Ireland, Italy, Japan, Kuwait, the Philippines, South Korea, Switzerland, Uruguay and several Eastern European countries), and also contain poorer countries which do not have the sort of tobacco restrictions that are prevalent in North America. The likelihood of those two factors being reversed in the short term is minimal at best.

So, for an investor seeking a high-yielding, sustainable stock to buy and hold for the long term, Philip Morris International in the mid-$90 range with its 4.34% dividend yield is an excellent stock to consider. Furthermore, earnings per share was $4.19 over the past twelve months, and EPS growth over the next five years is estimated at 8.27%, leveling off to 7.1% thereafter. Using a discount rate of 11% - the stock market average - fair value is estimated at $121.05. The stock is thus undervalued by 21% at this time.

The price-to-earnings ratio of 22.89 may make this claim seem absurd, especially compared to the stock's five-year average P/E ratio of 16.8, but take into account that all of Philip Morris' earnings come from non-U.S. dollar currencies, and those same earnings are then converted into U.S. dollars. The strength of the dollar relative to the currencies in which Philip Morris gets its earnings suggests a weaker earnings profile than the reality warrants.

That is the reason why the earnings figures have seen a slow and steady decline since 2012. And it is the reason for the payout ratio of 97.50%. Currency fluctuations and the strong dollar combine to provide metrics that make Philip Morris International seem like a riskier choice than it really is.

Disclaimer: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.