Is Phillip Morris Likely to Continue Its Ascent?

With shares of Phillip Morris International (NYSE:PM) trading at around $93.61, is PM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The following is an approximate geographic revenue breakdown for Phillip Morris:

  • 40 percent from EU
  • 40 percent from Asia
  • 12 percent from Latin America and Canada
  • 8 percent from Eastern Europe, Middle East, and Africa

Growth in Asia had been strong, but it has been nearly non-existent of late. This doesn’t mean growth won’t rebound, but it should be noted. In other areas of the world, Latin America and Canada revenues were down 0.3 percent last quarter year-over-year, and EU revenues were down 4 percent year-over-year. The good news is that revenues for Eastern Europe, the Middle East, and Africa increased 11.3 percent year-over-year.

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Phillip Morris has many strong cigarette brands to its name. Therefore, as long as people continue to smoke, the company will have potential to grow. Considering a highly addictive product is being sold, it’s a safe bet that people will continue their habit.

Phillip Morris has seen pricing power of late, and it enjoys global diversity. Other positives include an increase in cash and cash equivalents, consistent share buyback programs, and a 3.60 percent yield (though not as high as peers). On the other hand, there has been decreased market share in Argentina, Brazil, and Mexico; decreased market share in Southern Europe; a decline in cigarette volume; an increase in long-term debt; and an excise tax hike in the Philippines.

Now let’s take a look at some numbers. The chart below compares fundamentals for Phillip Morris, Altria Group (NYSE:MO), and Reynolds American (NYSE:RAI). Phillip Morris has a market cap of $154.07 billion, Altria has a market cap of $73.23 billion, and Reynolds American has a market cap of $26.20 billion.

PM

MO

RAI

Trailing   P/E

18.00

16.92

17.82

Forward   P/E

14.90

14.23

14.09

Profit   Margin

27.81%

25.00%

18.29%

ROE

N/A

119.14%

27.10%

Operating   Cash Flow

N/A

 $3.86 Billion

   $1.46   Billion

Dividend   Yield

3.60%

4.80%

4.90%

Short   Position

0.80%

1.30%

3.40%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak  

The debt-to-equity ratio for Phillip Morris is weaker than the industry average of 1.80. Debt management is a concern. When interest rates increase and the market weakens, Phillip Morris might be forced to cut back on its rewards to shareholders.

Debt-To-Equity

Cash

Long-Term Debt

PM

3.10

$3.98 Billion

$25.60 Billion

MO

3.85

$3.78 Billion

$13.88 Billion

RAI

0.99

$2.78 Billion

$5.09 Billion

 

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T = Technicals Are Strong   

Phillip Morris has performed very well over the past three years. However, this has become the expectation for all stocks throughout the broader market, not the exception.

1 Month

Year-To-Date

1 Year

3 Year

PM

0.97%

12.98%

9.06%

125.20%

MO

4.71%

17.54%

18.46%

108.80%

RAI

8.05%

16.83%

24.91%

120.40%

 

At $93.61, Phillip Morris is trading above all its averages.

50-Day   SMA

93.00

100-Day   SMA

90.56

200-Day   SMA

90.14

 

E = Earnings Have Been Strong            

Earnings and revenue have consistently improved over the past three years. The rate of growth has slowed, but this isn’t a growth play. As long as big profits are rolling in and the dividends are being paid, nobody will complain.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

63.64

62.08

67.71

76.35

77.39

Diluted   EPS ($)

3.31

3.24

3.92

4.85

5.17

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings.

3/2012

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   millions

18.02

20.04

19.59

19.74

18.53

Diluted   EPS ($)

1.25

1.36

1.32

1.26

1.28

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Tobacco is addictive. Therefore, while there might be ups and downs, the industry will always exist and at least perform decently. There has been a significant increase in health-consciousness in the United States, but that doesn’t impact Phillip Morris.

All cigarette companies, regardless of where they sell product, are attempting to innovate in order to increase growth. The goal is to find a product that significantly reduces the health effects of tobacco while still generating profits.

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Conclusion

There are definitely concerns for Phillip Morris, which include decreased market share in many areas and poor debt management. However, up until this point, Phillip Morris has done a good job rewarding its shareholders. While history usually repeats itself, that’s not necessarily an all-positive in this case. Phillip Morris didn’t hold up well in 2008/early 2009. If a similar environment were to present itself again, then Phillip Morris wouldn’t be a top option – regardless of the impressive yield. In the meantime, Phillip Morris is an OUTPERFORM.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.