Philip Morris International Inc. (PM) or Altria Group Inc (MO)?

Altria’s biggest opportunity is SABMiller and the gains that can be made from the global market for alcohol, a much larger and still-growing market as compared to tobacco.

Threats

The obvious threat to both producers is declining tobacco sales and regulation around the world. Additionally, the leading brand for both Philip Morris and Altria is the Marlboro brand, which is considered almost a luxury product with its price exceeding that of most other cigarettes. The threat is that this brand will be undercut by lower-cost producers. This already appears to be underway, as Altria noted a 7% decline in Marlboro sales for the first quarter while sales of its lower- cost products expanded 11%.

On the other hand

Philip Morris and Altria Group Inc (NYSE:MO) both have their strengths and weaknesses, but a key player in the tobacco market is Universal Corp (NYSE:UVV). Rather than manufacturing cigarettes, Universal Corp (NYSE:UVV) is a grower of tobacco, so the company offers more in the way of diversification than its peers.

Indeed, Universal’s tobacco is sold to all major and minor cigarette producers. The company’s tobacco is also used for pipes, cigars and fine cut rolling tobacco – all product lines that are registering growth while the consumption of cigarettes declines around the world. Indeed, the consumption of cigars is rising as the world becomes richer and this should offset some of the decline of tobacco that is used in cigarettes.

In addition, Universal Corp (NYSE:UVV) is cheaper than Philip Morris and Altria. Universal trades at an EV/Revenue multiple of 0.7x compared to Philip Morris’ 5.1x and Altria’s 4.4x. Universal also trades at a lower EV/EBITDA multiple of 6.2x compared to Altria’s 9.6x and Philip Morris’ 10.8x. Universal also has a much stronger balance sheet with a current ratio of 2.8. Plus, debt-to-equity is only 10%.

Foolish summary

All in all, the biggest threat and weakness both companies face it their reliance on a dying industry – tobacco. However, Altria is in a much better position to continue producing profits and shareholder returns without an over reliance on cigarettes.

Overall, I would have to say that Altria wins over Philip Morris International Inc. (NYSE:PM); or for the contrarian value investor, Universal looks to be a good play.

The article Philip Morris or Altria? originally appeared on Fool.com and is written by Rupert Hargreaves.

Fool contributor Rupert Hargreaves owns shares of Altria Group (NYSE:MO). The Motley Fool owns shares of Philip Morris International. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.