The Marlboro Man Speaks Chinese Now

06/03/2008 12:00 am EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says newly spun out Philip Morris International offers strong growth potential to investors who are OK with what it does.

Once upon a time, the Marlboro Man rode alone on his horse across a rugged Western landscape.

Now, with smoking increasingly unpopular in the US and Europe, he has to circle the globe to rustle up smokers.

All of this will wind up being bad for the health of smokers in these parts of the world. But for investors, it's positive, particularly since the Marlboro Man's international sponsor, Philip Morris International (NYSE: PM) was just spun off from US cigarette maker Altria (NYSE: MO), which also spun off most of its food businesses as Kraft (NYSE: KFT) last year.

Investors can now profit from a clean play on the [likely] success of the Marlboro Man as he wins over emerging middle classes around the world.

Marlboro’s move into China will take years, but it could ultimately be the biggest piece of the story for investors. Here's why: China has 350 million smokers, including 60% of the men there. Each year, they puff on 2.3 trillion cigarettes, or about two-fifths of the cigarettes smoked around the world, according to JPMorgan Chase analyst Erik Bloomquist.

The obstacle for foreign companies in China is that the state-run tobacco company, Chinese National Tobacco, has a monopoly on the market. For the new Philip Morris International (PMI), however, this shouldn't be a problem, because it signed a joint venture agreement with Chinese National in 2005.

PMI has been holding up its end of the deal by selling Chinese cigarettes outside the country. The payday should come late this year or soon after as it begins selling its brands in China. But because investors expect infiltration of China to happen slowly, the change is not yet fully priced into PMI’s stock.

The company sees opportunity in many emerging markets. In India, for example, smokers consume 100 billion "Western-style" cigarettes a year, compared with 800 billion bidis, the flavorful local preference. As incomes rise, more smokers will switch over to Western smokes offered by PMI.

Besides wooing smokers around the globe, PMI plans to increase prices and cut costs. PMI [also] has tons of cash to deploy. Last year it produced $5.6 billion in cash on $55.1 billion in sales. [Soon] it will buy back stock aggressively [to the tune of $13 billion].

Together, these tactics should lift profits by 12% a year over the next five years, on annual sales growth of 4% to 5%. That's the forecast of Goldman Sachs analyst Judy Hong. She thinks these trends will drive this "must own" tobacco stock to $60 a share in a year. (The stock closed at around $52 Monday—Editor.)

Throw in an annual dividend of $1.84 per share (for a 3.7% yield), and the result should be healthy returns for anyone who buys now—and doesn't mind owning a company that sells a product likely to send its users to their graves early.

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