- Shares of Philip Morris International Inc (PM), the world's largest non-state-owned cigarette maker, rose as much as 5 percent on Monday morning in their first day of trading after the company was spun off from Altria Group Inc (MO)
- Investors have long anticipated the Philip Morris International spinoff as a way to get a pure play on the growing overseas tobacco business without being tied to a shrinking U.S. cigarette market. The company trails only state-run China National Tobacco Co in terms of global market share.
- Philip Morris International has forecast annual growth in earnings per share of 10 percent to 12 percent. Altria expects its own earnings growth to be 8 percent to 10 percent annually.
- Earlier this month, Philip Morris International Chief Operating Officer Andre Calantzopoulos said there were plenty of areas to grow the cigarette business, noting that only one in six smokers around the world smokes a Philip Morris brand.
- He said the company has little or no presence in large cigarette markets like China, Vietnam, India and Bangladesh.
- 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.
- 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 overseas.
- 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.
- 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 stated that it expects earnings growth of 12%-14% in 2008
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