Sin Stock Philip Morris International Just Became a Screaming Buy

After taking a breather from a rally, this undervalued tobacco giant is now a smart buy in an overbought market.
By Siddhi Bajaj ,

Marlboro cigarettes maker Philip Morris International (PM) - Get Report has had a good run so far this year.

The stock is up more than 15%, despite beating analyst estimates on earnings just once in the past four quarters. Even income investors have benefited from the more than 4% dividend yield and the dividend growth track record of at least eight years.

However, the most recent quarter's earnings announcement left investors high and dry. Indeed, weak corporate earnings for the S&P 500 this quarter could presage a market drop.

Philip Morris International reported a second-quarter net income decline of 5% to $1.79 billion, which led to an earnings-per-share miss of 5 cents on revenue of $6.65 billion, versus estimates of $6.77 billion.  

But perhaps the biggest shocker came by way of shipment volumes that slipped 4.8%, more than initially expected. Currency fluctuations, the strength in the dollar and lower volumes in low-margin geographies were the culprits.

The announcement on July 19 drove the stock 3% lower, and it hasn't really recovered since.

But there is plenty of reason to think that there is still steam left in the rally, and now is an opportune time to buy the stock. Philip Morris International is among a group of recession-resistant investments that can help protect investor portfolios as storm clouds gather over the global economy.

The dollar's strength continues to eat away at Philip Morris International's profits and revenue but to a lesser degree.

Despite the hiccup in the second quarter, management said that the company would deliver on its guidance, which still represents "a currency-neutral adjusted diluted EPS growth rate of approximately 10% to 12% versus 2015."

In fact, expecting the currency impact to be lower in the future, the tobacco company has even raised its full-year guidance by 5 cents a share to a range of $4.45 to $4.55 a share. Further, it expects the impact of the strength in the greenback to be limited to 40 cents a share.

The reason for this optimism is that the company expects demand to pick up in the second half this year, especially in the fourth quarter.

Philip Morris International increased spending on reduced-risk products such as Marlboro IQOS Heatsticks, which use a device to heat a cigarette instead of burning it, also pressuring earnings, according to Wells Fargo.

However, that investment is beginning to bear fruit. The company has recorded exceptional performance in Japan where it grabbed a 2.2% market share.

Philip Morris International is extremely bullish on the space and has even expanded its contract with Altria for this category of products.

It might seem counter-intuitive for a cigarette manufacturer to introduce products that promote e-smoking. However, this move helps ensure that the even health-conscious people turn to Philip Morris International to satisfy their tobacco cravings.

Overall, global trends seem to be tipping in favor of tobacco companies such as Altria, Philip Morris International and ReynoldsAmerican. A growing number of smokers outside the U.S. in low- and middle-income nations, higher gross domestic product forecasts in emerging economies leading to affordability, and an overall expanding population will all contribute to the profits of these companies.

Analysts expect Philip Morris International's earnings growth to increase nearly 8.3% annually for the next five years, outpacing the S&P 500's 7.5%. The attractive dividend yield only makes the offer sweeter.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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