Is Philip Morris International Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Philip Morris International (NYSE: PM  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Philip Morris' story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Philip Morris' key statistics:

PM Total Return Price Chart

PM Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

24.7%

Fail

Improving profit margin

17.9%

Pass

Free cash flow growth > Net income growth

16.7% vs. 38.0%

Fail

Improving EPS

59.6%

Pass

Stock growth (+ 15%) < EPS growth

114.0% vs. 59.6%

Fail

Improving return on equity

Negative Equity 

Fail

Declining debt to equity

Negative Equity

Fail

Dividend growth > 25%

46.6% 

Pass

Free cash flow payout ratio < 50%

64.6%

Fail

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we're going
Despite frequent mentions as the best tobacco stock on the market, Philip Morris manages only three out of nine possible passing grades. This is a problem shared by its American counterpart, Altria (NYSE: MO  ) , which earned only two passing grades when it went through the same examination. In fact, smaller domestic tobacco stocks Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) both seemed to be better on a fundamental basis late last year than these two halves of the longtime Philip Morris empire.

Philip Morris carries a much larger debt load (nearly $23 billion) than Altria, and this number has been steadily rising in recent years -- since Philip Morris' spinoff, its debt load has grown 200%. That's actually better than the growth in Altria's debt, which is up nearly 600% over the same time frame. The cost of maintaining a high dividend yield can undermine a company's long-term financial health, but Philip Morris has some wiggle room, should it decide that it's time to pay down its obligations.

Philip Morris does enjoy some opportunities that its American peers don't, but it also faces some drawbacks in countries that are even more progressive on anti-tobacco legislation than the United States. For example, Australia has mandated the elimination of packaging graphics, which eliminated Philip Morris' brand strength in that country. Russia is also looking into stricter regulations, and other countries may follow in the near future.

Out of the many possible elements of its business that are ultimately out of its hands, one of the most frustrating must be the impact of currency fluctuations. Weaker international currencies, particularly in the euro, have significantly eroded the U.S.-based company's growth rates in dollar terms. Philip Morris can fight back against regulations in the courts and halls of government of the countries it operates in, but there's nothing it can do to change the tide of currency exchange rates, which are tilting against the eurozone (and toward the U.S.) as its long crisis drags on.

Putting the pieces together
Today, Philip Morris has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Tobacco companies have been under siege in the U.S. for decades, as waves of litigation, regulation, and anti-smoking campaigns have given the industry a black eye. Yet Philip Morris International focuses on overseas markets, where business prospects generally look brighter. Investors have been happy with its stock's performance, but is Philip Morris still a buy? Find out in The Motley Fool's premium research report on the company, which includes in-depth analysis of its opportunities and challenges ahead. To claim your report just click here now.


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