Philip Morris Brief Thoughts and Valuations

Philip Morris International’s (PM) premium positioning of its strong brands, global scale, and addictive products give the firm a wide economic moat, in our opinion. While some of the company’s more mature markets are experiencing lower cigarette demand, we expect that the company’s Asian operations will continue to be an engine for the firm’s future growth.

Philip Morris International is the world’s second-largest tobacco company, behind only China National Tobacco, and holds 28% of the non-U.S./non-China global market. The firm owns seven of the leading 15 international brands. Marlboro, the company’s flagship brand, accounted for about one third of total volume in 2011. Other key brands include: L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Both of the above descriptions were taken from Morningstar.

Asset Valuation

• With intangible assets and goodwill $11.73 per share.
• Without intangible assets and goodwill $8.34 per share.

EBIT and Net Cash Valuation

• Philip Morris currently has -$7.59 in net cash per share.
• 5X is $42.07 per share.
• 8X is $65.97 per share.
• 11X is $89.86 per share.
• 14X is $113.76 per share.

Revenue and EBIT Valuation

• Low estimate is $27.09 per share.
• Base estimate is $49.29 per share.
• High estimate is $71.50 per share.
  

Operating Cash Flow and Free Cash Flow Valuation

• Low estimate is $76.24 per share.
• Base estimate is $111.43 per share.
• High estimate is $146.62 per share.

Debt Ratios

• Current assets to current liabilities=0.92
• Total debt to equity is not applicable because PM has negative equity.
• Total debt to total assets=58%.

As with Vodafone, Philip Morris’ valuations are all over the place.

Philip Morris was spun off from Altria so that it could get away from the massive amount of litigation that is involved in the United States tobacco industry. Foreign countries are increasingly bringing litigation and sanctions upon tobacco companies that operate in their  respective countries such as Australia and Norway, but at this point it does not look to be a massive problem for PM.  It is something to watch for continuing into the future however as the proposed plain packaging could really hurt PM’s results as it would deemphasize the Marlboro brand and packaging.

Knowing what I know about its massive competitive advantages, which are generally the same as those I outlined in my Altria article, its risks, which are also generally the same as Altria’s, I would use the 11X EBIT and cash valuations, $89.86 per share, as my estimate of Philip Morris’ intrinsic value.  Philip Morris is currently selling at $89.48 per share meaning that there is absolutely no margin of safety.  My current cost basis for PM is $69.38 per share, up 27% since I bought in June of 2011.

Again, PM is one of the companies I bought before doing any kind of valuation so I am very fortunate to be up anything at this point. Philip Morris has gigantic competitive advantages, huge margins, creates a lot of free cash flow, pays a very good dividend, and buys back its shares.  My main concerns with PM long term are the same as Altria, a lot of debt, pensions, etc.

With my cost basis being so low I plan to hold onto my PM shares for years and hopefully decades and hope to have my investment compound well into the future.

Whopper Investments third weekly challenge, Altria, Greenlight Capital, and a Free Moat Webinar

Altria

Here is this weeks valuation and analysis challenge from Whopper Investments if anyone would like to try their hand.

This weeks challenge is McDonald’s from 2005 before Bill Ackman bought into them.  While I will be waiting to see what the readers post and see what I can learn from their analysis.  I will not be participating in the challenge this week.

Instead I will be researching, analyzing, and valuing Altria (MO) which I hold in my portfolio.

When I originally bought Altria I was not doing any type of valuation and I was not doing anywhere near the amount of research or analysis I am doing now.

I want to see:

• A) What I would value them at to see if they are under or overvalued now.
• B) I got a bit lucky as my position in them is now up about 30% since I originally bought, and I want to see if I would still buy them knowing what I know now.

I am interested to see how far I have come since then and hope to have my mini write up on the blog within a week.

Greenlight Capital

This is Greenlight Capital’s second quarter letter to shareholders.  They talk about Europe and some of its positions.

Free Moat Webinar

I cannot vouch for how good this free webinar on Moats from Morningstar is going to be since I have not watched it, but I thought I would put it on here for anyone who might be interested in it.

Enjoy