Altria Group Inc (NYSE:MO), on the other hand, is still growing thanks to the company’s diversified operations, lack of exposure to currency movements, and in comparison to Philip Morris, relatively low excise taxes.
So, based on a SWOT (strengths, weaknesses, opportunities and threats) analysis, is it time to sell Philip Morris in favor of Altria Group Inc (NYSE:MO)?
Strengths
Philip Morris International Inc. (NYSE:PM)’ main strength is its international presence; unfortunately, this has come back to bite the company recently as I will show. Still, Philip Morris’ international presence allows for diversification and no single reliance on any one market, a problem that Altria is stuck with. Philip Morris International Inc. (NYSE:PM) also has one of the biggest portfolios of tobacco products and cigarettes, which puts it in every segment of the market from luxury to value.
Altria’s strengths also lie in its diversification but not its tobacco diversification. Although tobacco is Altria Group Inc (NYSE:MO)’s main revenue stream, the company has wine estates and a 20% holding in SABMiller, which will allow the company diversification away from the general declining tobacco market.
Weaknesses
The biggest weakness to both Altria and Philip Morris International Inc. (NYSE:PM) is the declining consumption of tobacco, although this is not such a big issue for Altria Group Inc (NYSE:MO) as it is somewhat diversified. In addition, both companies face potential regulation from governments in the regions in which they operate. Philip Morris, however, faces the bigger risks as the company is exposed to many more governments around the world. Moreover, Philip Morris International Inc. (NYSE:PM) faces the threat of excise taxes, which have been rising faster than revenue and the strong US dollar, which hit earnings hard in the second quarter.
Opportunities
When it comes to opportunities, both companies are limited as global cigarette consumption is declining. That said, the opening up of the Chinese market is a huge potential opportunity for Philip Morris International Inc. (NYSE:PM). There is also an opportunity in the eCig market for both companies. However, it would appear that Altria is making more progress in the eCig market alongside its smoke-free products such as snuff.
On the other hand, Philip Morris has exposure to the global cigar market – a highly lucrative area for the company. Altria Group Inc (NYSE:MO) has exposure to this market but only within the US.
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.
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