Is Philip Morris International the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Philip Morris International (NYSE: PM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Philip Morris International.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.3% Fail
  1-Year Revenue Growth > 12% 8.7% Fail
Margins Gross Margin > 35% 64.3% Pass
  Net Margin > 15% 26.7% Pass
Balance Sheet Debt to Equity < 50% 322.2% Fail
  Current Ratio > 1.3 1.07 Fail
Opportunities Return on Equity > 15% 133.1% Pass
Valuation Normalized P/E < 20 18.67 Pass
Dividends Current Yield > 2% 3.9% Pass
  5-Year Dividend Growth > 10% 11.6%* Pass
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. * 3-year growth rate. Total score = number of passes.

Philip Morris International smokes up a respectable six-point showing. Although the tobacco giant isn't seeing spectacular growth, its slowly rising sales combine with a healthy dividend to make its shares attractive to many investors.

Philip Morris International is a great example of how a corporate spinoff can work well. By packaging its international business into a separate company, Altria (NYSE: MO  ) freed up Philip Morris International to thrive without the fear of liability exposure stemming from its U.S. operations. Over the three years since the spinoff, both companies have produced double-digit annual percentage share gains even in the challenging market environment.

Philip Morris International has found extremely lucrative markets overseas. With its combination of pricing power and a strong brand, the company sees much better margins than U.S.-oriented tobacco companies like Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) . And although Philip Morris International has to deal with international competitor British American Tobacco (AMEX: BTI  ) , which pays a better dividend and trades at a cheaper valuation, it still has dominant market share.

The major blemish on Philip Morris International's record is its debt load. If the company chooses to push some of its cash flow toward reducing debt, then the tobacco leader could easily look a lot more like the perfect stock in the future.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Philip Morris International to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Philip Morris International is a Motley Fool Global Gains selection. The Fool owns shares of Altria Group and Philip Morris International. 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 Fool has a disclosure policy.


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  • Report this Comment On April 01, 2011, at 1:55 AM, trenton1ryan wrote:

    One of the most intelligent articles from MF in a long, long time.

    Your second to last paragraph sums it up perfectly.

    Disclosure: long PM

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