An increase in cash flow will help to fade away debt fears and negative market sentiment. And if Philip Morris hedges well against currencies fluctuations this quarter and keeps up the good work in Asia, we could see cash improvements sooner than expected.
Sell side price-target well above current market price
The sell-side recommends Philip Morris. According to Yahoo! Finance, the mean price target for Philip Morris is $97.86 per share, which suggests a 10% upside from the current price.
Competitors in the U.S. can’t replace Marlboro
British American Tobacco PLC (ADR) (NYSEMKT:BTI) and Reynolds American, Inc. (NYSE:RAI) are two prominent competitors in the American market. In particular, Reynolds American, Inc. (NYSE:RAI) holds the No. 2 position in the U.S. cigarette market thanks to its core brands (Camel and Pall Mall). British American Tobacco PLC (ADR) (NYSEMKT:BTI), on the other hand, is geographically more diverse (with a strong presence in Europe) and owns about 42% of Reynolds American, Inc. (NYSE:RAI).
But none of these brands, from Camel to Lucky Strike, can replace Marlboro, the largest selling brand of cigarettes in the world
Reynolds American, Inc. (NYSE:RAI) actually sold the international rights of its brands to Japan Tobacco back in 1999, and this limits the possibilities for international expansion. In this way, Reynolds American is way too exposed to a market increasingly concerned about health. This is also the reason why the firm’s sales remained flat over the last year.
But even though sales remain flat, Reynolds American’s stock price has increased steadily. The company used to trade at a P/E ratio of 12 until 2011. Since then, a 47% increase in stock price has taken the P/E ratio to 18, quite high for a company with limited international expansion and flat sales in America. This makes Reynolds stock not only expensive, but also exposed to a market correction anytime. And considering that British American Tobacco PLC (ADR) (NYSEMKT:BTI) owns 42% of the company, the risks of Reynolds American, Inc. (NYSE:RAI) are also risks for British American.
The bottom line
It’s no secret Americans are smoking less. This trend will probably strengthen in the future, and the way tobacco companies deal with this fact will eventually determine their future valuations. In this context, Philip Morris International Inc. (NYSE:PM) (a company with exposure to both America and emerging economies) looks very attractive as an investment. Growth in Asia, strong presence in Europe and the fact that its poor earnings were caused only by macroeconomic reasons make Marlboro look attractive over a long-term horizon.
The article This Tobacco Company Offers Great Value originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Adrian 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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