Is It Time to Light Up With Philip Morris?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the year draws to a close, I would like to pinpoint a leader in the tobacco industry, Philip Morris International (NYSE: PM).

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Strengths:

  • Solid Sales Growth: In 2008, Philip Morris reported sales of $25.7 billion; in 2011 the company raked in $31.1 billion in sales; representing a year over year annual growth rate of 6.56%, this caliber of growth is expected to continue into the future with projections putting 2015 sales at $36.4 billion

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  • Massive Dividend: Currently, Philip Morris pays out a quarterly dividend of $0.85, which annualized puts the company’s dividend as yielding 4.00%
  • Net Profit Margin: Currently Philip Morris possesses a net profit margin of 27.45%, which displays a company that is extremely profitable and strong
  • Reasonable Valuation: Currently the company possesses a price to earnings ratio of 16.98, and a price to sales ratio of 1.86, both of which point to a company trading with a reasonable valuation
  • Institutional Vote of Confidence: 70% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Addicting Business Model: The products Philip Morris sells include cigarettes and other tobacco products, with its most prominent brand being Marlboro, and these products are addicting to their users, creating a consistent revenue source  

Weaknesses:

  • Debt: Currently Philip Morris possesses about $22.4 billion of debt on its balance sheets, and this statistic has done nothing but rise over the past years, and is a major flaw in the business

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  • Lack of Book Value: Currently, Philip Morris possesses -$0.68 per share in book value, and this statistic has just continued to fall over the past years

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  • Market Saturation: Philip Morris operates in over 180 countries, excluding the United States, and there is little room left for geographical expansion going into the future
  • Unhealthy Product: Cigarettes, Philip Morris’s main product, has been proved over and over again to be harmful to the consumer, however the tobacco industry has been established for centuries, and it is unlikely to disappear anytime soon
  • Company Competes Against Itself: Philip Morris is a holding company, and holds several brands of cigarettes, including Marlboro, L&M, Fortune, Bond Street, and Parliament, and these brands compete against each other for market share

Opportunities:

  • Acquisitions: In June 2011, Philip Morris acquired a cigarette business in Jordan, and further acquisitions are likely to occur in the future and fuel further growth
  • Dividend Growth: Since implementing their dividend program in 2008, Philip Morris has consistently raised their payouts, and it is highly anticipated that this trend will continue

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  • Product Innovation: Philip Morris has poured millions into research and development, and in 2011 the company launched Marlboro Beyond in seven markets, and further innovation should fuel future growth into the future
  • Emerging Markets: Asian and Latin American markets are among the fastest growing tobacco industries in the world, and Philip Morris has a strong presence in these emerging markets which should fuel growth (2010-2011 Revenue Growth: Asia: 34.91% Latin America: 8.06%)

Threats:

  • Competition: Philip Morris faces immense competition in the tobacco industry, and this competition can cut into profits
  • Stagnant Economic Landscape: Philip Morris’ tobacco products are not cheap, it costs thousands of dollars to take up smoking, and a stagnant global economy could hurt Philip Morris’ revenue
  • Government Regulation: While most international governments have bigger concerns than smoking, government regulation on smoking could hurt the company’s business
  • Massive Taxes Placed on Tobacco: Most governments around the world place huge taxes on the sale of tobacco, further adding to the costs of smoking for the consumer

Competition:

Major publically traded competitors of Philip Morris include Altria (NYSE: MO), Lorillard (NYSE: LO), Reynolds American (NYSE: RAI), and Vector Group (NYSE: VGR). All of the competitors compete directly with Philip Morris and produce tobacco products. Altria pays out a dividend yielding 5.53%, and carries the Marlboro brand in the United States. Lorillard pays out a dividend yielding 5.30%, and owns the prominent Newport brand. Reynolds American pays out a dividend yielding 5.65%, and is valued at $23.3 billion. Vector Group pays out a dividend yielding over 10%, and is valued at just over $1.3 billion.

The Foolish Bottom Line:

Philip Morris has a major advantage over its competitors because of its sheer size, being valued at $141.9 billion. Philip Morris possesses solid revenue growth and has a massive dividend. The company sells a product that is terrible for the consumer, however one that is highly demanded in emerging markets. All in all, Philip Morris is a tremendous long-term investment that will provide investors tremendous long-term results.   


makinmoney2424 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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