Philip Morris Has Plenty of Room to Grow

Investors should not give up on Philip Morris just yet.

May 23, 2014 at 9:35AM

Going by the headline figures, Philip Morris' (NYSE:PM) first-quarter results appeared pretty bad, although the underlying figures revealed a different trend. Indeed, the volume of cigarettes sold by the company declined 4.4% during the quarter, but underlying volume only declined 2% -- better than the wider industry average of 4%.

What's more, inventory movements distorted Philip Morris' headline revenue figures. For example, headline net revenue and adjusted operating income figures, both excluding currency, declined by 1.6% and 3.1%, respectively.

Nevertheless, excluding the inventory distortions and the changes made to Philip Morris' business in Egypt undertaken as part of a company-wide restructuring, Philip Morris' net revenue and operating income remained essentially flat.

Adjusted diluted earnings per share increased by 4.7%, excluding currency.

However, while these results were mixed, investors need to take into account Philip Morris' long-term growth prospects.

Well placed for growth
Philip Morris has three key things working in its favor. Firstly, and most importantly, it has brand loyalty. Philip Morris' Marlboro brand of cigarettes is one of the world's best-known brands and a leader in the cigarette sector.

Secondly, Philip Morris has size. The company's operations sprawl from Canada to Australia, and there are very few regions where the company does not sell its Marlboro-branded cigarettes (including China).

Thirdly, thanks to its size Philip Morris can achieve impressive economies of scale and cost advantages across the globe. For example, Philip Morris recently closed its manufacturing facility within Australia as part of a plan to cut costs, switching production instead to South Korea, where labor costs are lower.

Furthermore, according to analysts at the investment-research company Morningstar, due to its global presence Philip Morris could increase its profit margin by 2%, or $800 million per annum, by streamlining the business and closing high-cost manufacturing operations in favor of lower cost facilities.

Philip Morris' global diversification and presence within Asia puts it far ahead of its peers in terms of growth. The advantage of the company's presence within Asia and other emerging markets is the fact that cigarette sales are more stable within these regions. Actually, within Indonesia, Turkey, and the Philippines, cigarette sales volumes are expanding at mid-single-digit rates as laxer regulatory environments lead to more smokers taking up the habit -- great news for Philip Morris' bottom line.

Another play
Still, if Philip Morris doesn't appear attractive and you're looking for a play on the international tobacco market, Universal Corp (NYSE:UVV) could be a great alternative.

Universal was founded during 1918, so the company has nearly 100 years of operational history behind it. This experience has allowed the company to become a leader in the supply of tobacco. Think of the company as a kind of middleman for big tobacco that links tobacco farmers, distributors, and customers around the world.

Universal's network consists of 25,000 farmers and the company accounts for 40% of Africa's tobacco production, 30% of North America's production, and 25% of Brazil's production. Universal supplies some of the world's largest tobacco companies including Philip Morris and China National Tobacco Corp, which account for 58% of the global cigarette market between them. 

Actually, as China Tobacco is a state-owned company the only way investors can profit from the company's dominance is through Universal. The Chinese cigarette market is one of the fastest growing in the world with the number of cigarettes sold within the country expected to expand between 1.5% to 2.5% by 2015; Universal is set to profit from this.

Foolish summary
So in overall terms Philip Morris still has plenty of opportunity to drive growth both through cost-cutting initiatives and rising sales and the number of smokers within emerging markets continues to grow. All in all, investors should not give up on the company just yet. 

 

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends MORN. 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.

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