Philip Morris International (PM) Quarterly Valuation

moneyCompany Profile (obtained from Google Finance): Philip Morris International Inc. (PMI) is a holding company. PMI’s subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Its products are sold in approximately 180 countries. The Company divides its markets into four geographic segments: The European Union (EU) Region , The Eastern Europe, Middle East & Africa (EEMA) Region , The Asia Region and The Latin America & Canada Region. In June 2011, it completed the acquisition of a cigarette business in Jordan, consisting primarily of cigarette manufacturing assets and inventories. January 1, 2011, it established a business structure with Vietnam National Tobacco Corporation (Vinataba) in Vietnam, further developing its joint venture with Vinataba through the licensing of Marlboro and establishing a PMI-controlled branch for the building of its brands.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $125.58
MG Opinion Undervalued
Value Based on 3% Growth $70.88
Value Based on 0% Growth $41.55
Market Implied Growth Rate 4.36%
Net Current Asset Value (NCAV) -$17.56
PEmg 17.22
Current Ratio 1.00
PB Ratio -18.20

Balance Sheet – 9/30/2013 

Current Assets $16,016,000,000
Current Liabilities $16,018,000,000
Total Debt $21,877,000,000
Total Assets $36,795,000,000
Intangible Assets $12,467,000,000
Total Liabilities $44,224,000,000
Outstanding Shares 1,606,080,000

Earnings Per Share

2013 (estimate) $5.35
2012 $5.20
2011 $4.88
2010 $3.94
2009 $3.25
2008 $3.32
2007 $2.85
2006 $2.92
2005 $2.69
2004 $2.22
2003 $1.95

Earnings Per Share – ModernGraham 

2013 (estimate) $4.89
2012 $4.48
2011 $3.96
2010 $3.42
2009 $3.11
2008 $2.96

Conclusion:

Philip Morris looks like a good value opportunity for both the Defensive Investor and the Enterprising Investor.  The only requirement of the Defensive Investor that is not met is the current ratio, and since it is suitable for the Defensive Investor, it is by default also suitable for the Enterprising Investor.  For value investors seeking to follow Benjamin Graham’s methods, this company should be very intriguing, especially given its high dividend yield.  For comparative purposes, value investors may wish to review the ModernGraham valuation of Altria Group (MO) and other companies that meet the ModernGraham requirements.  From a valuation perspective, the company fares well after having grown EPSmg (normalized earnings) from $2.96 in 2008 to an estimated $4.89 for 2013.  This level of growth more than supports the market’s implied estimate of 4.36%, leading to the company being seen as undervalued by the ModernGraham valuation model.  As a result, Defensive Investors and Enterprising Investors should feel very comfortable proceeding with further research to determine if the company is suitable for their individual portfolios.

What do you think?  What value would you put on Philip Morris (PM)?  Is the company suitable for Defensive Investors and Enterprising Investors?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Philip Morris (PM) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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Comments

2 responses to “Philip Morris International (PM) Quarterly Valuation”

  1. Mick Avatar
    Mick

    One big issue that is missing from this analysis is the fact that PM is currently in a negative equity position. Generally not great for a defensive investor

    1. Benjamin Clark Avatar

      Thanks for the comment. That’s certainly true and a concern to keep in mind when conducting further research into the company. That issue affects the 7th criteria for the Defensive Investor, and raises a question – should it be modified to also require a positive value for PB ratio or a positive value for PB x PEmg?

      Anyone else have some thoughts on this?

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