Philip Morris International: Attractive, Undervalued Growth Stock

Philip Morris International, Inc. (PM) is a leading cigarette maker that distributes its products outside of the United States. The company was spun off from the Altria Group (MO) in March 2008 in order to avoid the deleterious effects of ongoing legislation against the tobacco industry. For years now, the industry has been a favorite whipping boy for its increasing revenues. I believe the split from Altria Group has already been favorable for PMI and not yet fully appreciated by the market. I further believe that years of aggressive consumer rights lobbying have resulted in the unintended consequence of creating high barriers to entry that deny competition and product improvement.

And yet we still know Philip Morris for its famous brand name cigarettes: Marlboro, Longbeach, L&M, Parliament, and the always sexy Virginia Slims. What we might not be familiar with is that Philip Morris International has carved out a lucrative international market and sells its products entirely outside of the United States. PMI is a $120B market-cap company, while the parent it was spun off from (Philip Morris USA of the Altria Group) is less than half that at $56B.

Since PMI became its own separate company in March 2008, shareholder value has increased by around 39% while the Altria Group has gone up by around 21%. During the same time period, the S&P has been down approximately 12.1%

Several factors are driving value creation for the leading cigarette maker. First, the company sells its products in more than 180 nations with total shipment around $900B for 2010, a 4.1% increase from the preceding year. It sells local brand cigarettes in each country: Sampoerna A, Dji Sam Soe, and Sampoerna Hijau in Indonesia and Optima and Apollo-Soyuz in Russia, to name just a few. Indonesia and Russia make up PMI's largest markets. While local brands help retain a strong marketing appeal, international cigarettes continue to represent a large portion of sales at 70%. The biggest brand-name product, Marlboro, makes up 33% of shipment volume for the company.

In the vast majority of the nations PMI sells to, it is either the number 1 or number 2 producer in terms of market share. Another reason why I am bullish on this stock is because it operates in emerging markets and is gaining a foothold there to lock out competition. While tobacco companies are intensely regulated when it comes to marketing in the United States, they are comparatively lightly regulated abroad. This presents an opportunity for PMI to create loyal customers before the competition does. Philip Morris is in the perfect position now to attract a market that has historically been loyal to first purchase brands.

Moreover, many of the nations the firm markets its products to have emerging economies. Asia, in particular, will drive growth in the future. Philip Morris has a market share of around 16% in the $5.6 trillion international cigarette market. The company is growing in Indonesia, Korea, Colombia, Serbia, the Philippines, among many others.