PM - Philip Morris International

[thefatbaboon]

I'm loving how they hold your hand in the Aggreko report and explain their business lines, competitors etc.  I wish more companies did that.

 

Be careful what you wish for!  the euro might revert to dollar parity  :o

[Philip Morris IV]

Since it hasn't been mentioned yet - perhaps worth noting that one of our favorite CEOs, Sergio Marchionne has been on the board since the spinoff.

 

He's been buying 1,000 shares at a time every 1-3 months, like clockwork.  Total ownership 52,687 shares.  Overall insider activity is mixed but rather dwarfed by the buyback program in full swing.

[sys]

while currencies may not revert to equilibrium over time, should that not be the case for the purchasing power of foreign populations expressed in us dollars?

 

that is to say, although the currency of emerging market x may continually fall in value versus the dollar, over the long-term, shouldn't inflation and their gdp grow faster than the us by a rate that more or less offsets the decline in currency value - allowing their populace to continue purchasing pm cigarettes at the same volume and relative price as current.

[ourkid8]

Summary of Philip Morris 4Q and FY13 Earnings

 

http://finance.yahoo.com/news/philip-morris-4q-fy13-earnings-180719298.html

[FCharlie]

Wow.  Philip Morris is borrowing ten year money at 1.625% and also five year money at 0.75%

 

 

I don't think I can recall anyone borrowing at levels this low.

 

 

 

 

[Philip Morris IV]

That is impressive -- a testament to massive cash flows.

 

The AGM is May 7th at the Grand Hyatt in NYC.  I was planning to go, but sadly have to fly out that morning.  :(

[randomep]

Wow.  Philip Morris is borrowing ten year money at 1.625% and also five year money at 0.75%

 

 

I don't think I can recall anyone borrowing at levels this low.

 

Wow, considering inflation that is like free money! I love it! Why can't the freaking Japanese companies learn to do that!

 

Where did you read it? btw

[orthopa]

Looks like a couple on the board own PM but isn't well followed.  I guess one cant be blamed as the price hasn't done much but moved sideways for ~3 years. For the long term holder this looks like a gift for the buyback (although decreased) and ability to reinvest the divs.

 

Do many stay away due to ethical reasons or slow long term decline of smokers? Its my biggest holding and love the economics of the business and how shareholders are treated. MO also ranks high in my mind too.

 

It will be interesting to see what effect if any the IQOS system has on volumes, the acceptance of smoking, and any reduce risk branding. 

[wachtwoord]

I like both companies but PM is not cheap and MO is very expensive. I'd like to own both at a better price though.

[orthopa]

I like both companies but PM is not cheap and MO is very expensive. I'd like to own both at a better price though.

 

I agree.

[sleepydragon]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

[FCharlie]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

 

[actuary]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

Agree. What makes cigarette prices high? Do we have data showing that demand is becoming more elastic? On the contrary, PM's more expensive brands continue to take market share globally. It seems as individuals/societies get wealthier, they want to move to the better brands of consumer products. Plus, global volumes are still increasing with emerging market growth outweighing developed market declines. Hold on to your hat if PM ever cracks China and India. There is still a huge runaway for global market share gains with PM at 16% of the international market (28% ex China) versus MO with 50% of the US market.

 

This company has room to leverage the balance sheet further. Regardless, they can continue to return substantially all cash flow to shareholders. And they have shown they are very disciplined at that over long periods of time. I believe they have stated they manage the business long-term for 10% dividend growth per share. So thinking about that plus the 5% current yield, you are looking at a pretty attractive prospective return for a highly predictable business with global regulatory risk diversification.

 

I still think there is a ton of untapped pricing power here. And don't forget that earnings rise on flat revenue if volume declines.

[ourkid8]

What is everyone's take on PM performing a tax inversion to another jurisdiction outside the US?

 

Tks,

S

[sleepydragon]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

but isn't the volume growth is zero or slightly negative too?

[FCharlie]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

but isn't the volume growth is zero or slightly negative too?

 

PM Volume:

 

2006:  829.3 Billion

2007:  848.6 Billion

2008:  869.7 Billion

2009:  864.0 Billion

2010:  899.8 Billion

2011:  915.2 Billion

2012:  927.0 Billion

2013:  880.1 Billion

 

I think in general the trend is flat to slightly growing. PM occasionally makes acquisitions which boost volume, and periodically there are large disruptions in specific countries which cause volume declines. Overall, I don't think of PM as a shrinking company. Even with flat volume, they always will have pricing on their side. Governments will always want more money, governments will always increase taxes, and PM will price higher right along with the higher taxes.

 

 

[thefatbaboon]

What is everyone's take on PM performing a tax inversion to another jurisdiction outside the US?

 

Tks,

S

 

I've asked this of IR a number of times with no success.  My other question is why they don't take more leverage.  Also, here IR have a trite response that their single A rating is very valuable as it allows them in the CP market.  Don't know why they think a few basis points of savings in CP is better than buying in equity with a 5% after tax cost. Sigh.   

 

The big issue with PM in my view is currency.  Nearly everyone misunderstands currency as something that jumps around and "evens out over time".  But that is rubbish.  Of course it can even out but there is no reason to assume it will - and many examples over history have very long term shifts in one direction.  The GBP bought 5 USD at the beginning of the 20th century. 40 years ago the USD bought 300 yen.  15 years ago the USD and the Euro were trading at par. None of those have "bounced back" - yet. 

 

Obviously pricing can make up for negative currency shifts but PM needs pricing for revenue growth so if PM uses it up overcoming currency then those are years where there isn't enough "left over" for revenue/OI growth.  Hence the situation between 2011 and 2015.  USD OI and FCF will be lower in 2014 and 2015 than three/four years below.  This means the only return on PM over the last four years is the dividend yield - an underlying reality that is fairly reflected in the stock which has rightly gone nowhere (efficient market?!).  And I see no reason to assume an "evening out bounce back in currency" any time soon.  In fact if someone put a gun to my head a forced me to speculate, my money is on the dollar to strengthen further.  Given weakness in the euro zone, the currency war stance of the yen, the general crappiness of many peripherals (ruble, peso etc), and the relatively sound fundamentals in the USA - it's possible the next four years will be more of the same.

 

 

 

 

[FCharlie]

What is everyone's take on PM performing a tax inversion to another jurisdiction outside the US?

 

Tks,

S

 

I've asked this of IR a number of times with no success.  My other question is why they don't take more leverage.  Also, here IR have a trite response that their single A rating is very valuable as it allows them in the CP market.  Don't know why they think a few basis points of savings in CP is better than buying in equity with a 5% after tax cost. Sigh.   

 

The big issue with PM in my view is currency.  Nearly everyone misunderstands currency as something that jumps around and "evens out over time".  But that is rubbish.  Of course it can even out but there is no reason to assume it will - and many examples over history have very long term shifts in one direction.  The GBP bought 5 USD at the beginning of the 20th century. 40 years ago the USD bought 300 yen.  15 years ago the USD and the Euro were trading at par. None of those have "bounced back" - yet. 

 

Obviously pricing can make up for negative currency shifts but PM needs pricing for revenue growth so if PM uses it up overcoming currency then those are years where there isn't enough "left over" for revenue/OI growth.  Hence the situation between 2011 and 2015.  USD OI and FCF will be lower in 2014 and 2015 than three/four years below.  This means the only return on PM over the last four years is the dividend yield - an underlying reality that is fairly reflected in the stock which has rightly gone nowhere (efficient market?!).  And I see no reason to assume an "evening out bounce back in currency" any time soon.  In fact if someone put a gun to my head a forced me to speculate, my money is on the dollar to strengthen further.  Given weakness in the euro zone, the currency war stance of the yen, the general crappiness of many peripherals (ruble, peso etc), and the relatively sound fundamentals in the USA - it's possible the next four years will be more of the same.

 

A couple of years ago, someone asked Louis Camilleri why they don't lever up more and buy back more stock. I believe this was at investor day a few years ago. His response was pretty good. First off he said that even though it was tempting to borrow commercial paper at 35 basis points and buy back 5% yielding stock, he said that PM was not going to do "Long term stuff with short term money"  He also said that they buy a lot of stock as it is, and that he didn't understand anyone who thinks buying $5-6 Billion of stock in a year, year after year is not aggressive enough. 

 

I thought that was a very good answer... and I too was someone who thought they should be buying more aggressively.

 

Right now people have this idea that the US Dollar will only go up and the EURO will implode. People thought this in 2010 also. People forget that the US has $18.1 Trillion of debt and this is a number that will not go lower, ever. My suspicion is that when the EU begins QE, the USDollar will peak against the Euro. If that is true, and PM gets back some of what's been lost in currency, and continues increasing pricing and buying back stock, the stock PM will explode higher. At this point, we could easily see well over $1 billion of profit from currency fall to the bottom line as the dollar weakens. No one believes it today, but that's why the stock is flat for years.

 

 

[orthopa]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

but isn't the volume growth is zero or slightly negative too?

 

Volume growth essentially does not matter as long as pricing power compensates for any loss in smokers.  What PM has on its side that is often overlooked is population growth. Even more so the countries and people that smoke the most also tend to reproduce the most. PM also has the opposite effects on compounding percentages in a negative and positive fashion on its side. ie negative 3% (smoking decrease rate) compounded for 10 years is not as impact-ful as 3% growth (pricing power) compounded times a constant ie cigarette volume.

 

As mentioned currency is masking the true cash generating ability of the company as ~.72 of a currency hit occurred on a reported $5.00 of EPS. In my mind the company then made 5.72 last year and on a currency neutral basis should make ~$6.00 this year. That being said its currently trading at ~13.5x this years projected earnings on a currency neutral basis. Not super value territory but throw in a ~5% div yield with a possible YOC of 10% in 7-10 years with div increases and my ears perk up.

 

Management will come out with this years projections and I expect the currency hit to be near $1.00 of EPS this year. As mentioned this is like holding a beach ball underwater and a currency shift will fuel earnings to the upside substantially. We saw this in 2011 and that year the div was raised 22% as a result. My best guess is that the EU is where we were in 2011-2012 when we started QE, operation twist etc. By no means nothing is set in stone but it could be 2-3 years until we see the euro start to make a meaningful comeback. The dollar also seems to be pricing in a "definite" raise in rates by the Fed. Any dovish shift in the fed outlook or underwhelming rate increase outlook and the dollar will recede.

 

The div is safe and it appears the main casualty of the currency issue will be the buyback but management has projected 2-3B a year in buybacks for 2015 which should be good enough to take ~30M shares a year off of the roll and goose the div accordingly.

 

China is the wild card and would the ultimate market. The communist leaders recently opened the country to V and MA so the trend looks to be to allow more American companies into the monopolies the communist party enjoys. Smoking is a big source of revenue and that may be a tough nut to crack in the short term.

 

What I love most about the business is the little investment it requires. That with the strong pricing power ensures a constant flow to return to shareholders or use for acquisitions. Last year PM acquired a portion of Megapolis to expand its reach into distribution.

 

The new RRPs could be the very beginning of the "devillianizing" of smoking if found to truly have reduced risk. The crux of the anti smoking campaign is the damage that smoking causes. What if it isn't as nearly damaging as it once was and obesity becomes a bigger killer and cause of heart disease?

 

We know ~1 Billion humans love to smoke via the effects of nicotine, hopefully PM finds a lower risk more sociably acceptable way for them to do it.

[orthopa]

What is everyone's take on PM performing a tax inversion to another jurisdiction outside the US?

 

Tks,

S

 

I've asked this of IR a number of times with no success.  My other question is why they don't take more leverage.  Also, here IR have a trite response that their single A rating is very valuable as it allows them in the CP market.  Don't know why they think a few basis points of savings in CP is better than buying in equity with a 5% after tax cost. Sigh.   

 

The big issue with PM in my view is currency.  Nearly everyone misunderstands currency as something that jumps around and "evens out over time".  But that is rubbish.  Of course it can even out but there is no reason to assume it will - and many examples over history have very long term shifts in one direction.  The GBP bought 5 USD at the beginning of the 20th century. 40 years ago the USD bought 300 yen.  15 years ago the USD and the Euro were trading at par. None of those have "bounced back" - yet. 

 

Obviously pricing can make up for negative currency shifts but PM needs pricing for revenue growth so if PM uses it up overcoming currency then those are years where there isn't enough "left over" for revenue/OI growth.  Hence the situation between 2011 and 2015.  USD OI and FCF will be lower in 2014 and 2015 than three/four years below.  This means the only return on PM over the last four years is the dividend yield - an underlying reality that is fairly reflected in the stock which has rightly gone nowhere (efficient market?!).  And I see no reason to assume an "evening out bounce back in currency" any time soon.  In fact if someone put a gun to my head a forced me to speculate, my money is on the dollar to strengthen further.  Given weakness in the euro zone, the currency war stance of the yen, the general crappiness of many peripherals (ruble, peso etc), and the relatively sound fundamentals in the USA - it's possible the next four years will be more of the same.

 

A couple of years ago, someone asked Louis Camilleri why they don't lever up more and buy back more stock. I believe this was at investor day a few years ago. His response was pretty good. First off he said that even though it was tempting to borrow commercial paper at 35 basis points and buy back 5% yielding stock, he said that PM was not going to do "Long term stuff with short term money"  He also said that they buy a lot of stock as it is, and that he didn't understand anyone who thinks buying $5-6 Billion of stock in a year, year after year is not aggressive enough. 

 

I thought that was a very good answer... and I too was someone who thought they should be buying more aggressively.

 

Right now people have this idea that the US Dollar will only go up and the EURO will implode. People thought this in 2010 also. People forget that the US has $18.1 Trillion of debt and this is a number that will not go lower, ever. My suspicion is that when the EU begins QE, the USDollar will peak against the Euro. If that is true, and PM gets back some of what's been lost in currency, and continues increasing pricing and buying back stock, the stock PM will explode higher. At this point, we could easily see well over $1 billion of profit from currency fall to the bottom line as the dollar weakens. No one believes it today, but that's why the stock is flat for years.

 

I agree and essentially typed the same. The Yen maybe a bit of a different story as Japan needs to de lever even more so the the EU. The silver lining for those holding long term and investing the divs has been the stationary share price allowing management to buyback more.

 

I'm by no means an expert of currency hedging and was wondering if anyone could tell me why PM has not been able to hedge meaningfully over the past 2 years in regard to currency?

[randomep]

seems no revenue growth. volume is declining, cigarette price is already very high. that's keeping me from hitting the buy button. it's hard for me to buy if there no prospect for any growth at all.

 

Revenue and profit growth are being masked by the major headwind of the strengthening US Dollar. If you watch this over time, however, you will see the opposite happen as well, such as 2011. Currency comes and goes. That's why PM always reports constant currency numbers along with their regular numbers. What's happening today is actually setting PM up for a very nice rebound when currency shifts back. The stock price has been flat for years, even as the company has increased it's dividend higher and higher, repurchased tons of stock, and taken price increases every year. This is going to be like a beach ball that's been held underwater and finally let go when currency turns around... I just don't know when that will be, although my assumption is that we are close.

 

but isn't the volume growth is zero or slightly negative too?

 

As mentioned currency is masking the true cash generating ability of the company as ~.72 of a currency hit occurred on a reported $5.00 of EPS. In my mind the company then made 5.72 last year and on a currency neutral basis should make ~$6.00 this year. That being said its currently trading at ~13.5x this years projected earnings on a currency neutral basis. Not super value territory but throw in a ~5% div yield with a possible YOC of 10% in 7-10 years with div increases and my ears perk up.

 

 

Hi Orthopa, can you explain what you mean regarding the currency?  The USD index is say 90 today and earnings is 5.00 today. Ok if the index goes back to 80 I can see you believe the earnings power is $5.72.  But we don't know which way the currency will go? Is your arguement implicitly shorting the USD?

 

 

[FCharlie]

 

 

I'm by no means an expert of currency hedging and was wondering if anyone could tell me why PM has not been able to hedge meaningfully over the past 2 years in regard to currency?

 

 

PM has never hedged currency. They have a tendency to believe it's a fools game to try and predict currency movements and would rather focus on the business.

[FCharlie]

Hi Orthopa, can you explain what you mean regarding the currency?  The USD index is say 90 today and earnings is 5.00 today. Ok if the index goes back to 80 I can see you believe the earnings power is $5.72.  But we don't know which way the currency will go? Is your arguement implicitly shorting the USD?

 

 

In every PM 10Q and 10K filing they report the impact of currency on E.P.S. so far this year it's running around negative 72 cents, or just over a billion dollars. Because most investors focus on E.P.S. only, they only see a company that is not growing at all. Underneath, PM is reporting an underlying increase from pricing and buybacks, only slightly offset by higher interest expense. The trick to PM, (other than to hold forever of course)  would be to buy when currency is hammering the bottom line, with the thinking that it won't last forever. When PM reports $1 billion of currency gains + $700 million of pricing + a 30 cent impact from fewer shares outstanding, you get a blue chip stock with 20-25% E.P.S. growth and everyone goes nuts. If you're a trader, that's when you sell. If you're like me, you simply stop buying and look elsewhere.

 

Long term, I think PM is probably the greatest company on earth. After all, who else has 30%+ free cash flow margins on their product? Who else has almost no real need for reinvestment in the business and can return 100% of cash year after year after year? All of this with a 5% yield that has increased every year for something like 48 or 49 years (MO+PM)... At a minimum, one should expect their return for holding PM long-term to be equal to the dividend plus the annual increase in dividend. This has a tendency to be 15% or so annually and I think it can go on for decades.

 

 

 

 

[randomep]

 

No I got it about MO, I have owned it since 2000, believe me I know its history.

 

But to say PM earns $5.72 USD last year is incorrect. It earnd $5 last year. The PE today is 80/5. That's all I was pointing out.  Ok you can compare relative performance to calculate EPS growth fine.

 

Orthopa said next year it will earn $6 next year. The only way that'll happen in the real world if the USD drops. If you can predict that the USD will drop ok, then I'll load up on PM and stocks in France. But we don't know.

 

 

[sleepydragon]

Thank you very much.

Regarding China, would you please tell me why it's a big potential? A lot of people in China smoke Marlboro. So isn't PM already there?