Alcohol & Tobacco Stocks

Philip Morris International Annual Valuation – 2015 $PM

Philip_Morris_International_Logo_svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – April 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Philip Morris International (PM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Philip Morris International Inc. is a holding company engaged in the manufacture and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside of the United States. The Company’s products are sold in more than 180 markets, which include a range of international and local, premium, mid-price and low-price brands. Its premium price brands include Marlboro, Merit, Parliament and Virginia Slims; mid-price brands are L&M and Chesterfield, and international brands include Bond Street, Lark, Muratti, Next, Philip Morris and Red & White. Its local cigarette brands consist of Sampoerna, Dji Sam Soe and U Mild in Indonesia; Fortune, Champion and Hope in the Philippines; Diana in Italy; Optima and Apollo-Soyuz in Russia; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics and Number 7 in Canada; Best and Classic in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece, and Petra in the Czech Republic and Slovakia.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  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 – FAIL
  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 – FAIL

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

Key Data:

Recent Price $83.81
MG Value $51.11
MG Opinion Overvalued
Value Based on 3% Growth $63.28
Value Based on 0% Growth $37.09
Market Implied Growth Rate 5.35%
Net Current Asset Value (NCAV) -$21.06
PEmg 19.20
Current Ratio 0.95
PB Ratio -9.53

Balance Sheet – March 2015

Current Assets $14,275,000,000
Current Liabilities $14,980,000,000
Total Debt $25,572,000,000
Total Assets $33,255,000,000
Intangible Assets $10,775,000,000
Total Liabilities $46,871,000,000
Outstanding Shares 1,548,000,000

Earnings Per Share

2015 (estimate) $3.09
2014 $4.76
2013 $5.26
2012 $5.17
2011 $4.85
2010 $3.92
2009 $3.24
2008 $3.31
2007 $2.86
2006 $2.92
2005 $2.69

Earnings Per Share – ModernGraham

2015 (estimate) $4.36
2014 $4.93
2013 $4.84
2012 $4.45
2011 $3.94
2010 $3.41

Dividend History

Conclusion:

Philip Morris International is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, inconsistent dividend history, and the poor PB ratio.  The Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.94 in 2011 to only an estimated $4.36 for 2015.  This level of growth does not support the market’s implied estimate of 5.35% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Philip Morris International (PM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Philip Morris International (PM) at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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