Here's Why to Be Fired Up After Philip Morris Got Smoked Tuesday

The tobacco giant's fall after reporting weak operating results is a compelling and shrewd buying opportunity.
By John Persinos ,

Philip Morris International (PM) - Get Report  fell sharply Tuesday in the wake of weak operating results, but the tobacco giant is an inherently strong company that still faces enormous growth prospects.

That simple equation should give investors cravings to buy shares.

Philip Morris International's shares lost 3% after reporting weaker-than-expected second-quarter earnings results.

Smokers in certain markets, especially in Argentina, Japan and North Africa, purchased fewer cigarettes in the quarter, leading to a 5% drop in shipments from a year earlier.

The New York-based company earned $1.79 billion or $1.15 a share, down from $1.89 billion or EPS $1.21 a share a year earlier. Analysts had expected earnings of $1.21 a share.

And yet, Philip Morris International's management remains confident and boosted its 2016 outlook. The company now expects full-year earnings per share in the range of $4.45 to $4.55, compared with previous guidance of $4.40 to $4.50.

Here is what Philip Morris International's management knows that Wall Street seems to forget: The company is pivoting away from slowing markets to embrace new growth areas. This strategy redirection will pay off over the long haul, making the stock a shrewd buy now.

With a market capitalization of $154.96 billion, Philip Morris International is expanding into untapped markets in developing nations, where a rising middle class is drawn to the iconic Western consumer brands that they associate with affluence and status. The most salient example is Philip Morris International's Marlboro cigarettes, which are on par with the Apple and Coca-Cola brands.

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To be sure, anti-smoking laws are becoming more prevalent in certain emerging nations, especially in cigarette-craving markets such as China and Russia. That is why Philip Morris International is embracing a product that actually competes with tobacco: electronic cigarettes.

E-cigarettes are starting to garner more regulatory scrutiny, but they are still less regulated than tobacco products. They aren't associated with deadly disease as of yet, and they give Philip Morris International a beachhead with a younger, free-spending demographic.

Philip Morris International began selling e-cigarettes in late 2014, using existing technology that it has since been honing.

The company's latest e-cigarette product is a perfected system that heats tobacco instead of liquid and doesn't require a power source such as batteries. This makes inhaling e-cigarette vapor or vaping, as it is called, easier and more pleasant.

A headwind for Philip Morris International has been the strong dollar, but that problem should ease as concerns over the Brexit fade and the struggling eurozone gets back on its feet, thanks to new monetary stimulus this year from the continent's central bankers.

Meanwhile, the exploding popularity of e-cigarettes is a major tailwind. Philip Morris International and Altria, an international cigarette and table wine producer, are partners in selling e-cigarettes. The company has exclusive rights to sell Altria's e-cigarettes outside the U.S., while Altria has exclusive rights in the U.S. to sell other Philip Morris International-made tobacco products.

In this overbought market, Philip Morris International is a compelling buy after its sharp drop. The stock's trailing 12-month price-earnings-growth ratio is 2.74, not excessive compared with the PEG ratio of 1.84 for Reynolds American.

By co-opting the e-cigarette fad, Philip Morris International is ensuring its survival and latching onto a new and lucrative growth driver. Tuesday's drop should fire investors up.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, he held stock in Apple.

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