Today's Buy Opportunity: Philip Morris International

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Today, my "11 O'Clock Stock" is sin purveyor Philip Morris International (NYSE: PM), the sister company of my previous 11 O'Clock Stock, Altria (NYSE: MO). They share the dominant Marlboro cigarette brand -- and the ire of many investors.

Before we get to the reasons for that dislike, let's take a quick overview of the company.

Fast facts on Philip Morris International

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

As I did with my previous pick, I'm going to do something a little unorthodox today. I'm going to give you 10 reasons NOT to buy Philip Morris, in no particular order. Then I'll tell you why I still made Philip Morris today's "11 O'Clock Stock" pick.

You shouldn't buy Philip Morris International because ...

1. You may have moral qualms because it's a tobacco company.
2. It generates almost half of its sales in the European Union. Further economic weakness there could lead to folks downgrading to cheaper brands, or finally sticking to their New Year's resolutions and quitting altogether.
3. Speaking of the European Union, most of the markets there are mature with respect to the tobacco industry. Hence, future growth prospects on a volume basis are dim.
4. It's highly leveraged, with a debt/equity ratio of 3.7:1.
5. The Chinese market, which contains 30% of the world's smokers, is a virtual monopoly of China National Tobacco. Philip Morris sells cigarettes under license in China, but its growth prospects there are limited unless the government opens up the market to true competition.
6. Since Philip Morris is an American company that generates all of its sales in foreign currencies, its earnings can fluctuate significantly based on the strength of the dollar. (A weak dollar juices earnings, while a strong dollar hurts earnings.)
7. The company's litigation risk will likely never go away. If anything, it could rise as markets mature.
8. As it seeks to expand or strengthen its presence in markets around the world, it faces an array of country-specific risks and challenges.
9. Excise taxes are hefty, and a good way for governments to make money easily. Expect them to continue rising.
10. Smoking bans and other forms of regulation are ever-increasing.

We should take a closer look at Philip Morris' aggressive debt position. Let's compare it against a few companies in the utility industry, which is known for huge debt loads that are justified by steady earnings and cash flows.

Source: Capital IQ, a division of Standard & Poor's.

Yes, Philip Morris has a significantly higher debt load and a smaller (though still quite tasty) dividend yield than the utilities, but its payout ratio is lower, and its interest coverage (via earnings before interest and taxes) is through the roof. Additionally, like the utilities, its business is relatively steady in good times and bad.

Now, on to the good stuff
I've given you 10 things to hate about Philip Morris International, but now I'm going to give you 11 things to love about it:

1. It's the dominant cigarette company worldwide outside of China (where China National Tobacco has its aforementioned virtual monopoly).
2. Even so, Philip Morris has only a 16% non-U.S. market share, and it plans on pushing growth in attractive countries like India.
3. Did I mention its 4.5% dividend yield, with healthy interest coverage?
4. The Marlboro brand is iconic worldwide.
5. But Marlboro isn't alone in Philip Morris' brand portfolio. It boasts seven of the top 15 international cigarette brands.
6. Tobacco has the benefit of inelastic demand, giving the industry considerable pricing power.
7. Industry aside, Philip Morris also can rely on the pricing power of its premium brands.
8. Philip Morris International provides U.S. investors with the rare opportunity to buy an American company that generates 100% of its sales in foreign countries. For a few comparison points, Pfizer (NYSE: PFE) generates 43% of its sales outside the U.S. and Ford (NYSE: F) is at about half its sales outside North America. It may surprise you that Procter & Gamble generates 62% of its sales outside the U.S., but that's still 38% short of an international pure play with U.S. corporate governance standards.
9. The risks with Philip Morris International are generally out in the open (I listed them above). When risks are transparent, the market can factor them in, providing a discount for those risks.
10. Over the past 12 months, its free cash flows were a good bit higher than its net income -- a very good thing.
11. Philip Morris' margins are borderline ridiculous -- 41% operating margins and 26% net margins!

The bottom line
As part of a balanced portfolio, I believe the rewards outweigh the risks on Philip Morris International. Its brand power, growth opportunities, healthy dividend, and eye-popping margins combine to make it a company to strongly consider.

For folks looking to add a new position, Philip Morris International is reasonably priced today (around $51 a share), attractive below $45 a share, and a truck-backer-upper below $40 a share.

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• Track the performance of our full list of recommendations.

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The Motley Fool will wait at least 24 hours after this publication before buying shares of Philip Morris International. To see an FAQ on "11 O'Clock Stock," click here.