Can Smokeless Cigarettes Light Up Philip Morris?

09/21/2016 7:00 am EST

Focus: GLOBAL

Genia Turanova

Editor, Leeb Income Performance

The world’s leading tobacco company took a breather in its recent rally after reporting second-quarter net revenue of $6.6 billion, down by 3.1 percent compared to a year ago, notes Genia Turanova, editor of Leeb Income Performance.

Philip Morris International (PM) reported earnings per share that came in under consensus estimates, at $1.78 billion, or $1.15 per share, down from $1.88 billion, or $1.21 per share, from the second quarter of 2015.

Despite this second-quarter hiccup, we continue to recommend Philip Morris as a long-term, defensive stock for your portfolio, one increasingly positioned for future growth.

Based on several factors, what we see bodes well for the company. First, the company has adapted to changing consumer preferences for healthier lifestyles and safer products.

The new Marlboro HeatSticks product (part of PM’s “smokeless” cigarette line) achieved a 2.2 percent share of the Japanese market.

The company says smokeless cigarettes may reduce health risks by warming up the tobacco in the cigarette as opposed to actually lighting it, which thereby eliminates the hazardous smoke and tar.

CEO André Calantzopoulos said that the growth potential of reduced-risk products represent the company’s greatest future growth opportunity, one that could possibly add $1.2 billion in profit to the bottom line over time.

Second, the company expects demand for its products to increase in the second half of 2016, especially during the fourth quarter due to increased demand in emerging countries.

Their full-year guidance (revised for improving currency) comes in at an EPS growth rate of approximately 10 percent to 12 percent versus 2015.

This target seems in line with new data that indicates a significant increase in the number of smokers in emerging economies.

With its exposure to international markets, Philip Morris is well situated to capitalize on this trend. Lastly, the company continues its strong income appeal with an annual dividend of $4.08 per share.

In an era of low interest rates, the opportunity to rake in a robust yield from a stable company acts as an ongoing magnet for investors and should push share price higher. For these reasons, we maintain our buy recommendation here.

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By Genia Turanova, Editor of Leeb Income Performance

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