2 Reasons Why Philip Morris Looks Like a Good Investment

Even though Philip Morris has struggled in recent quarters, its strategies suggest that the company can still deliver.

May 18, 2014 at 9:00AM

Tobacco giant Philip Morris International (NYSE:PM) has hit a rough patch as volumes of traditional cigarettes have been declining. Philip Morris, the parent of popular brands such as Marlboro and L&M, has trimmed its profit forecast for 2014, and international cigarette volumes are expected to fall 3% this year. However, Philip Morris will look toward the growing market for e-cigarettes to mitigate the weakness in its traditional business, where its rival Lorillard (NYSE:LO) is already making some gains.

Let us take a look at the various moves that Philip Morris is making, and see if they could help the company get back on the growth track.

Trying to capture more market share
Philip Morris has very simple goals for the year. The company will focus on effective cost controls, productivity gains, and marketing reduced-risk products, and it will use the strong pricing power of its brands. Philip Morris' brands are well-known across the globe, which is why the company commands almost 30% of the tobacco market outside of the U.S. and China. It is now looking to use its brand equity to gain more market share.

Philip Morris has strategically invested in restructuring its business in Egypt. This is a smart move by the company since Egypt is a 80 billion unit cigarette market. Additionally, Philip Morris purchased a 20% stake in Megapolis, which is the distributor of its products in Russia. This should give the company more control over its business in the large Russian market, and eventually help it increase its share in the region. The company expects that these two initiatives alone will add approximately $0.10 to its earnings per share in 2014. 

In addition, Philip Morris also bought the remaining 20% stake from its business partner in Mexico, and it also took a 49% stake in Arab Investors-TA. Arab Investors-TA manufactures and distributes international cigarette brands in Algeria. These moves should bolster Philip Morris' sales in the Europe, Middle East, and Africa, or EMEA, region along with Latin America, where it had registered double-digit growth rates in 2013.

In addition, Philip Morris is aggressively promoting Marlboro with its "Don't Be a Maybe, Be Marlboro" campaign. This campaign has received a positive response in most markets in the European Union, along with other regions. This was probably the reason why the volume of Marlboro cigarettes declined 4.1% in the quarter, which was below the overall volume decline of 4.4%.

Moving into e-cigarettes
Looking ahead, Philip Morris will make significant investments in risk-free products that reduce the risks of tobacco-related illnesses. The company will test these products in the second half of 2014 and finally launch them in the first quarter of 2015. According to The Wall Street Journal, global sales of e-cigarettes are around $2 billion, which is very small in comparison with the $800 billion tobacco market. However, this market is growing fast and sales of e-cigarettes are expected to exceed those of traditional cigarettes. 

That's why Philip Morris is trying its best to make the most of this opportunity. It has signed an agreement with Altria (NYSE:MO) under which both of these companies will share the technology for electronic cigarettes and reduced-risk products under several licensing and supply agreements. Altria has already made a move into the e-cigarette market with its MarkTen brand. Altria will distribute MarkTen nationally after initially testing it in Indiana and Arizona.

Philip Morris can benefit from this partnership since Altria already has some expertise in this area. Altria will license its e-cigarette products to Philip Morris for distribution outside the United States.

However, Lorillard could pose a challenge for Philip Morris in the international markets. Lorillard acquired SKYCIG, a leading e-cigarette player in the U.K, last year. Lorillard already commands around half of the e-cigarette market in the U.S. as a result of its Blu acquisition, and the company can leverage its expertise in this department in the international market as well. Because Philip Morris also has a presence in the U.K., it will run into Lorillard going forward.

Bottom line
Global cigarette volumes are expected to decline, but Philip Morris is doing the correct thing by trying to increase its market share. As a result, the company has acquired stakes in several distributors around the world. In addition, to boost volumes, the company is looking to tap the e-cigarette market. So investors should have faith in Philip Morris as it can get better in the long run.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers