A Smoking Hot International Opportunity

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The Initial post references Altria being the Parent Company of Philip Morris. Altria is the parent company of Philip Morris USA, not Philip Morris International. This post has been modified in order to clarify.

Philip Morris International (NYSE: PM) owns the #1 cigarette brand in the world, Marlboro, along with other brands such as L&M, Fortune, Bond Street, Parliament, Red & White, and Virginia Slims. They also own a small cigar segment and have been growing its position in smokeless tobacco such as Swedish snus. Smoking cigarettes in the United States has become known as "disgusting," or as being a bad habit, but internationally this is not the case.

As sales in America have slowed, sales outside of America are raging on. For this reason, consider Philip Morris a much better play than Altria Group (NYSE: MO), who handles sales within the United States. This is also the reasoning for picking Philip Morris International over Reynolds American (NYSE: RAI) and Lorillard (NYSE: LO). Both of these companies manufacture and sell cigarettes in the United States, which is not where the major growth lies. Reynolds' brands include Camel, Pall Mall, Winston, Salem, and American Snuff. Lorillard's brands include Newport, Maverick, Kent, Old Gold, and Kent. As you can see, the more popular brands lie with Philip Morris International, but the others still have strong positions in the market. 

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Philip Morris International is currently trading at $86.97 on Feb. 4, with earnings of $5.00 per share. At this price, it is trading at just 17.39 times earnings and 15.02 times 2013 projected earnings. These are great numbers, but what really sticks out is the company is projected to have earnings of $6.42 per share in 2014. This would make it currently trading at just 13.5 times those earnings. These multiples are much too low for the growth Philip Morris International has the potential to achieve in the next few years. Altria, Reynolds American, and Lorillard all have positive growth rates going forward, but not as high as this company.

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My favorite statistic of Philip Morris International is that they pay out a terrific $3.40 dividend, representing a 3.91% yield. This dividend has been raised each of the last 4 years, including a recent 10%+ raise. Altria Group, the parent company, has raised its dividend for 47 consecutive years. There is no reason that Philip Morris International will not follow directly in their footsteps. Altria, Reynolds American, and Lorillard all currently have higher dividends, but with growth factored in, they do not rise to the top of the list. Altria currently yields 5.15%, Reynolds yields 5.38%, and Lorillard yields 5.2%. If you are looking for dividend income with smaller returns from overall gains, one of these may be your better bet.

With all of this said, Philip Morris International is incredibly cheap. The current industry average for price to earnings is 19.86, which would value this company around $99 per share. I project that the stock will return above $90 per share by the end of the first quarter and will surpass $104 in 2013 based on 18 times earnings. Even if the stock were to trade sideways for a while, the solid 3.86% dividend will pay to wait for the move higher. I am initiating an outperform on CAPS. Altria, Reynolds American, and Lorillard are all BUYS. Philip Morris International is a STRONG BUY.

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JoeySolitro1 owns Philip Morris International. The Motley Fool owns shares of Philip Morris International. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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