Philip Morris International and the Tobacco Industry

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The American cigarette and tobacco company, Philip Morris International (NYSE: PM), operates in more than 200 countries. The company has four geographic segments; Latin America & Canada, Eastern Europe, Middle East & Africa (EEMA), The European Union (EU) and Asia. The company has a vast range of products, including low-price, mid-price, and premium price brands.

Philip Morris International’s Earnings

Philip Morris International’s 2012 fourth quarter income was up 11%, thanks to higher sales volumes in Eastern Europe, Middle East & Africa, and Asia. The company reported earnings of $2.1 billion, or $1.25 per share, versus earnings of $1.89 billion, or $1.08 per share year-over-year. Excluding tax impacts and write-downs, profit grew 12.7% from the previous year. Net revenue (excluding excise taxes) was up 2.8% to $7.9 billion.

In the Asia and EEMA region, the company’s revenue grew by 6% and 8.5%, respectively. However, revenue was down 6.6% in the European Union and down 4.5% in Latin America and Canada. Volume was up 5.7% in Asia and 7.1% in the EEMA region. It declined by 5.7% in the E.U., and in Latina America and Canada it was down 1.1%. The total cigarette volume was up 2.9%.

In the first quarter of 2013, the company expects earnings per share of $1.35 on revenues of $7.55 billion. For the year, analysts expect Philip Morris International to earn $5.78 per share on $32.66 billion of revenue.

Valuation

Philip Morris International is trading at a forward P/E (1yr) of 14.54 and has a PEG of 1.39. Incorporating its dividends into its PEG gives us a PEGY of 1.08. As Philip Morris has one of the lowest PEGY’s in the tobacco industry, it appears to be one of most undervalued stocks. With strong brands like Marlboro and Benson & Hedges, Philip Morris is expected to do slightly better than its rivals in coming years; therefore, I would use a premium of 5% while valuating it. Hence, I would value it using a forward industry P/E of 15.1 as opposed to tobacco industry’s forward P/E of 14.39x. 

According to consensus estimates, Philip Morris International’s value is $97. At the moment, it’s trading around $93, so it’s undervalued by 4.3%. Adding its dividend yield into this upside potential, we get to a total return of 8.1%, suggesting that Philip Morris International is one of the better buys in the tobacco industry.

Tobacco Industry

After having a great year (2012), Lorillard Tobacco Company (NYSE: LO) has recently increased its dividends by 6.5% to a quarterly dividend of $0.55 a share. Lorillard is trading at a forward P/E (1yr) of 11.49x and has a dividend yield of 5.40%. It has a healthy PEG of 1.47 and a PEGY of 0.94, making it a great bargain. A mean recommendation of 2.3 on the sell side testifies the fact that Lorillard is one of the most attractive buys in the tobacco industry.

Recently, America’s second largest tobacco company, Reynolds American (NYSE: RAI), released its earnings for the fourth quarter of 2012. The company’s earnings were down to $0.25 per share from $0.52 per share in the same quarter in 2011. Reynolds American is trading at a forward P/E of 13.22 and has a PEG of 1.92. A mean recommendation of 2.9 on the sell side suggests that it isn’t as attractive as Philip Morris International. You can look at my more detailed take on Reynolds American here.

Going Forward

The cigarette industry in Europe and North America faces high taxes and rising smoking bans. As a result, smokeless products such as nicotine gum and snuff are the way to go in the future. In 2009, Philip Morris International and Swedish Match AB partnered together in a joint venture enabling Philip Morris International to sell Smokeless products outside of the U.S. and Scandinavia.

The biggest catalyst for Philip Morris International in the coming years are emerging markets. In order to grow its margins in the region, the company has increased its prices in Asian markets. With more South Asians smoking, Philip Morris seems to be heading the right way. Further, with rising adult populations in India, Pakistan, and Bangladesh, the company is expected to grow its profits in South Asia.

As the tobacco industry hasn’t done that well lately, tobacco companies haven’t shown a lot of promise. As the U.S. economy faces uncertainty, things still look bleak. However, Philip Morris International is expected to do better than its peers in the years ahead, making it a better buy in the industry. In short, we recommend buying Phillip Morris International for a yield of 8%.


Vamosrafa7 has no position in any stocks mentioned. 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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