by Paul Tracy, editor High-Yield International
Philip Morris International
) is one of the largest international cigarette producers, with a 16% share of the 5.6 trillion international cigarette market, and seven of the top 15 global cigarette brands, including Marlboro.
The company, which was spun off from Altria Group in early 2008, derives most of its earnings and volume growth from emerging market.
Asia is a key driver of earnings and growth, contributing around 34% of net revenue. And within Asia three key markets -- Indonesia, the Philippines and Japan -- accounted for over three-quarters of 2011 volume.
China is the biggest cigarette market in the world, though almost the entire market is controlled by the Chinese National Tobacco Corporation (CNTC).
But PM is in a unique position in China as it has a license agreement with CNTC for Marlboro. Under the terms of the deal, PM delivers the blended tobacco and CNTC produces the cigarettes.
In addition, the two companies have formed an international joint venture to manufacture and sell Chinese brands outside China.
The long-term opportunities are clear -- it's the only western company with a cooperation agreement with CNTC. PM is cultivating a long-term relationship that would be a sizable growth driver for the firm when China opens up its market to foreign tobacco companies.
Although such a development might be some years in the future, any movement toward opening up the Chinese market would be a big upside catalyst for the stock.
PM is a shareholder friendly company. Since its IPO in 2008, it has spent $17.5 billion on share repurchases and another $15.6 billion on dividends. That represents nearly one-third of the company's market cap at the time of the IPO.
Management generally sets the dividend at around 65% of its earnings, a healthy ratio for a company operating in a stable, recession-resistant industry such as cigarettes.
As a result of its steady earnings growth in recent years, the firm has increased its dividend by 67% since 2008. Furthermore, the company has said that it should be able to buy back $6 billion of its stock in 2012, another possible upside driver for the stock.
Finally, the company has been very active on the cost-reduction front, slashing around $250 million in costs for 2011 and targeting a further $300 million in cost reductions for this year.
In a defensive business with strong growth prospects in emerging markets and a long-term strategic growth opportunity in China, Philip Morris International rates a buy under $95 with low risk.