Why is Altria Outperforming PMI?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I thought that one of the prime reasons for dividing Philip Morris into two companies, Philip Morris International (NYSE: PM) and Altria Group Inc. (NYSE: MO) was so that the legal problems Altria has been having in the U.S. won’t hold back the company’s international operations. But in fact Altria continues to out- perform Philip Morris International despite Altria's legal settlement, and the increase in smoking restrictions in the U.S. Further, the percentage of smokers in the U.S. is going down; in Europe the percentage of smokers' remains higher than in the U.S. So how all these facts result in Altria outperforming Philip Morris International?
First, is it true that Altria is doing better than Philip Morris? In the chart below are the normalized stock prices of both companies and the S&P500 index. The chart refers to 2012. As seen, Altria is doing a bit better than Philip Morris: during the year the former rose by 27.8%; the latter, by 13.6%. The S&P500, serving as a benchmark to the market, has done the worst of the three as it rose by only 4.8%.
Philip Morris International has done better in Q2 2012 than a year earlier: diluted earnings per share (EPS) rose by 0.7% compared to 2011. But Altria rose by a higher rate than Philip Morris International did during Q2: Altria's diluted EPS increased by 9.3% (excluding special items) during Q2 2012 compared to 2011. Altria is also beating Philip Morris International in operating profitability: every year of the last three Altria’s profitability was much higher than Philip Morris International 's.
The chart below shows this.
Finally even in regards to dividends, Altria is doing better: during the year Altria’s dividend yield reached 4.65%; Philip Morris International's yield, 3.5%. OK, so why is Altria doing better than Philip Morris International? There could be several reasons for that:
For one thing, Altria’s brands have a much stronger hold on the American market than Philip Morris International has in other markets. Philip Morris' brands hold nearly half of the cigarette market in the U.S. Since the number of the smokers in the U.S. nearly didn’t change, as I have pointed out in a recent post about Altria, this means the market share of Philip Morris International in the U.S. is still robust. During 2011 Philip Morris International reported a decrease in shipment volume of 5.1% to the EU region because of “lower total markets and share, mainly in Italy, Portugal and Spain, and a lower total market in Greece.”
The shipments didn’t rise much (only by 0.3%) in the Eastern Europe market. The only large market that expanded was Asia with an 11% increase in shipment.
The other consideration is the price of cigarettes: since there is much stronger competition in regions such as the EU than in the U.S., these price wars decrease Philip Morris International’s profitability. Even though it is hard to make a price comparison, the prices of cigarettes in the U.S. are similar to the prices in the Western EU but much higher than in Asia, one of the growing regions of Philip Morris International. This means that in Asia, the region with the highest growth rate, the price wars and low Purchasing Power Parity (in China and India) explain the lower profitability in Asia’s market than in EU market. Thus, the price wars in regions outside the U.S. lead to low profitability of Philip Morris International relative to the profitability of Altria in the U.S.
The Foolish bottom line:
The good performance of Altria might continue in the year to come especially as the lawsuits and settlements are getting sorted out and the uncertainty around the company’s future dissipates. The growth in Philip Morris International's operations in Asia could result in higher volume and profits which will sustain the company’s growth. But as long as Altria is dominating the American market, this could result in Altria continuing to upstage Philip Morris International.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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