Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Undervalued Companies for the Enterprising Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Philip Morris International (PM) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Philip Morris International Inc. (PMI) is a holding company. PMIâ€™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 Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$70.59|
|Value Based on 0% Growth||$41.38|
|Market Implied Growth Rate||4.33%|
|Net Current Asset Value (NCAV)||-$18.30|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Philip Morris International does not qualify for either the Defensive Investor or the Enterprising Investor. Â For the Defensive Investor, the concerns are the low current ratio and the negative book value. Â For the Enterprising Investor, the issue is the high level of debt relative to current assets. Â Until the balance sheet improves, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham Stocks & Screens while keeping in mind the 7 Key Tips to Value Investing. Â As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.11 in 2009 to $4.87 for 2013. Â This demonstrated level of growth is greater than the market’s implied estimate of 4.33% and leads the ModernGraham valuation model to return an estimate of intrinsic value that surpasses the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Philip Morris International (PM)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Philip Morris International (PM) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.