With Demand Dropping, Is Philip Morris International Still a Buy?

Volume and sales are down, and chances are the trend will continue. But this is still a cash-printing machine of a business with a laser-sharp focus on shareholder returns. What does that mean for investors?

Apr 22, 2014 at 8:30AM

Philip Morris International (NYSE:PM) is an interesting business to watch these days. While tobacco smoking continues to decline in the Western world and surges in emerging markets, other trends are taking shape -- including an ongoing rise in chewing and other nonsmoking tobacco products, as well as the precipitous rise of e-cigarettes. Philip Morris is unsurprisingly involved in all areas of the business, and recent results are (also unsurprisingly) mixed. Can the growth areas of the industry outweigh a broader decline in the once-unstoppable world of tobacco?

Blowing smoke
Philip Morris' fiscal first quarter showed some interesting trends, with strength in areas that have struggled and headwinds in previously growing segments. In the European Union, the company saw a 2.2% sales bump, though this was entirely due to favorable currency measures. Excluding exchange differences, sales actually dropped about 0.6% due to a slight decrease in market share.

The EMEA region, which includes the big-time smoking regions of Africa and the Middle East, declined 1.7% on the surface, but increased an impressive 4.5% once adjusted for currency. Leading the way was premium pricing in Russia. Asia, also a traditionally strong region, posted an adjusted decline of 8.7%, with particular weakness in Japan and Indonesia.

In total, sales dropped 1.6% on an adjusted currency basis, with cigarette shipment volume down more than 4% globally.

Does this point to troubling times ahead for the cigarette giant? Not according to management. Short-term guidance actually increased on both an adjusted and nonadjusted basis. Fiscal 2014 earnings are projected to grow in the neighborhood of 6% to 8%.

The good and the bad
The volume and demand declines will continue for the company largely focused on smoking tobacco. While Philip Morris does have a smokeless tobacco joint venture selling into the growing snus segment, the company isn't quite putting the same pressure on smokeless tobacco as peers in the U.S., such as Altria (which owns Philip Morris' U.S. business) or Lorillard.

Where the company excels is in distribution and operating platforms. Management has successfully tuned this business to thrive on cash flow. As a slow-growing, cash-driven business, Philip Morris is a big-time dividend payer with a current yield of 4.5%. These payouts are the crux of the argument behind a bullish Philip Morris International position. Management had nodded toward bigger payouts in the future as the company continues to refine its operations in various markets around the world, most recently in Egypt.

Given its global presence, the company is highly susceptible to foreign exchange ebbs and flows, so short-term numbers can easily become skewed. But investors should remain focused on the operating efficiency and long-term outlook for increased dividend payments. For the income-seeking, low-risk investor, Philip Morris remains a compelling story.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Michael Lewis 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers