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Does anybody here smoke? Or invest in cigarette companies? Or at least feel jealous of investors who have been in cigarette companies for years? Personally, I am neither a smoker nor an investor in the cigarette business, and I have felt regret when looking at stock charts of cigarette companies in the past, including those of Philip Morris International (NYSE: PM), British American Tobacco (NYSEMKT: BTI) and Altria Group (NYSE: MO).
The best performer for the 5-year period is Philip Morris International, whose stock advanced nearly 82%. The company is based in New York, but operated in around 180 countries outside the US. Its main revenue source of this company comes mainly from the European Union and Asia, whereas Latin America & Canada contributes only around 6-8% of total sales.
Recently, it reported its third quarter 2012 earnings result. Its diluted EPS of $1.32, 2.2% lower than the same period in 2011. The cigarette shipment volume was down by 1.3%. The company has raised its quarterly dividend to $0.85, 10.4% higher than its previous quarterly dividend of $0.77. For share repurchases, Philip Morris has bought back 16.7 million shares for $1.5 billion and it began a new 3-year share buyback program, which would be worth $18 billion.
As of September 30, it has $4.8 billion cash, $9.9 billion goodwill, $19.62 billion interest bearing debts and -$1.16 billion stockholders’ equity. We, investors, don’t like to see the fact that Philip Morris has loaded up more debt overtime. It loaded $5.6 billion more debt in the past 3 years. However, the current interest coverage of the company is as high as 17x, which is much higher than the Tobacco industry median of 8.2x. So its current debt level can be considered quite comfortable, compared to its operating results. In addition, the negative book value looks scary at first, but it is due to an increasing high level of treasury stock, meaning that Philip Morris has been repurchasing its shares over time. At the end of 2008, it repurchased only $5.15 billion, but as of June 2012, the share buybacks total has increased to more than $22.8 billion.
Philip Morris, British American Tobacco and Altria are operating in different markets. For British American Tobacco, its revenue sources are spread out between four regions: Americas, Western Europe. Asia Pacific and Eastern Europe, Middle East and Africa. The biggest revenue contributor is still Asia Pacific, with $4.25 billion, accounting for 27.6% of 2011 total sales. And for Altria, it is operating mainly in the US market. That is why Altria can be considered the most challenging company among the three as it serves only the US market, where cigarette volume is declining with tight regulatory control.
For valuation, currently, Philip Morris is trading at $91.85. The total market capitalization is $154.83 billion; the current dividend yield is 3.7%. Here is the comparison valuation among the three companies:
As we can see, Philip Morris' valuation can be considered fair compared to British American Tobacco and Altria. Because Philip Morris has negative book value, its P/B ratio is not valid. Altria seems to be the cheapest in terms of P/E ratio, but it will likely experience the least growth because it is operating in the declining US tobacco environment. British American Tobacco seems to be the most expensive with 20.1x P/E. Among the three, Philip Morris is expected to grow the most given its presence in the rapdily growing and less regulated emerging markets.
My Foolish Take
It is understandable why Philip Morris outperformed British American Tobacco and Altria. Asia Pacific, where its main revenue and profit source lies, is considered to be the fastest growing region of the cigarette business. In the short-term, the business might face tighter regulation and lower demand in some mature markets. However, I think that in the long run, with strong brands and fantastic loyalties of smokers, Philip Morris will keep prospering.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.