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?

Michael Lewis
Michael Lewis
Apr 22, 2014 at 8:30AM
Consumer Goods

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.