Growth Potential So Good, It's Sinful

04/29/2013 10:30 am EST


Stephen Leeb

Founder and Research Chairman, Leeb Group

Stephen Leeb of Leeb Group explains here why Philip Morris offers plenty to tempt both growth and income investors.

Despite not finishing the year near its highs, the shares of Philip Morris (PM) didn’t do too badly in 2012. Counting the dividend, the stock returned more than 10%, with price appreciation accounting for more than half of the total—6.5%.
While we don’t recommend smoking, Philip Morris (and its peer Lorillard (LO), a member of our High-Yield portfolio), nevertheless exemplify typical franchises. Not only do they perennially benefit from the habit, they also profit from smokers’ incredible—and reliable—brand loyalty.
But, of course, even strong franchises are not immune to economic struggles. For example, the challenging environment in the European Union region hurt Philip Morris’ 2012 (as of September) volume, which declined 6.6%.

The drop in the European Union primarily reflects lower cigarette volume, particularly in Southern Europe. Adult smokers have traded down to cheaper brands with lower taxes and tobacco cuts, other tobacco products, and even illicit products.
Despite that meaningful decline, the company has likely achieved its 1% global organic cigarette volume growth target for 2012, thanks to a superior geographic footprint that more than compensated for that decline.
Also, the incredible franchise strength enjoyed by Philip Morris has benefitted the company, and it is expected to report 2012 diluted earnings within the range of $5.12 to $5.18 per share, versus the $4.85 it made in 2011.

Excluding the unfavorable impact of currency and other adjustments, the full-year 2012 earnings per share guidance implies approximately an 11% to 12% growth rate. Such growth isn’t easy to find these days—and rarely does it accompany a 4% annual dividend.

We therefore maintain our Philip Morris recommendation. Buy.

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