Altria (NYSE: MO ) completed the long-awaited spinoff of its subsidiary Philip Morris International (NYSE: PM ) last Friday, and the Marlboro Man is finally free to roam the globe unfettered by the legal and marketing shackles of the U.S. domestic market.
Benefits for both the slimmer Altria and the new international company will be realized, but I think the international division will flourish on its own thanks to its leadership position in the international cigarette market and the strength and marketing potential of its global brand.
A global giant
Philip Morris International, or PMI, is the world's leading tobacco company and the third most profitable international consumer goods company. It generated revenue in excess of $55 billion and operating profit of roughly $8.9 billion in fiscal 2007.
The company sells its products in some 160 countries and owns seven of the top 15 brands in the world, including Marlboro, Parliament, Virginia Slims, and L&M. In all, PMI held a 15.6% share of the international cigarette market in 2007. The company is especially strong in the higher-margin premium segment of the market, where it estimates that it held a 52.4% share (excluding China) in 2007.
While cigarette consumption in the U.S. has been declining, the international tobacco market is an entirely different story as volume growth has been rising. I believe that PMI is well-positioned to benefit from this trend and management accordingly anticipates long-term earnings-per-share growth of 10% to 12%.
A strong and marketable brand
Whether you despise smoking or are an unrepentant chain-smoker, there's no denying that Marlboro is one of the world's best-known brands. According to BusinessWeek's annual rankings report, "The Best Global Brands 2007," the Marlboro brand was worth a cool $21.3 billion, placing it 14th on the list, and ahead of such household names as American Express (NYSE: AXP ) and PepsiCo (NYSE: PEP ) .
While some analysts are concerned with intensified competition from recent consolidation of global rivals, PMI already holds No. 2 global market share among tobacco companies. And to put the strength of the Marlboro brand in perspective, consider this: In 2007, Marlboro's volume of 311 billion units was larger than the next three best selling international brands combined. It also outsells the total combined volume of all of British American Tobacco's (NYSE: BTI ) global drive brands.
I can't help but believe that PMI's brands will only increase in strength as the company is now freed from marketing and regulatory constraints that were part and parcel of being part of Altria. Further, the company has already created a number of new Marlboro-branded products targeted at local markets, like the Marlboro Mix 9 in Indonesia, Marlboro Crisp Mint and Fresh Mint for Hong Kong, and Marlboro Wides for the Mexican market.
An attractive valuation
Shares of Philip Morris International opened today at around $51, or roughly 16 times fiscal 2008 earnings estimates of $3.11-$3.17, while offering a dividend yield of 3.6%. (Did I mention that management has already authorized a two-year, $13 billion share buyback program?)
This valuation is fairly in line with those of its smaller competitors, British American Tobacco and Imperial Tobacco Group (NYSE: ITY ) . But I believe that PMI should trade at a premium to these players given the company's leadership position in the international markets, its strong global brands and the fact that management has said it expects earnings growth of 12%-14% in 2008, without the impact of any accretive acquisitions that I fully expect to happen now that PMI has its own acquisition currency and doesn't have to worry about competition concerns in the U.S.
I'm extremely bullish about the prospects of Philip Morris International and think investors should pick up a pack or two of PMI. No ID required.