The world is more complicated today than ever. Investing is no longer as simple as looking at management teams, brands, products and balance sheets. When investing in most global companies, you also need to be aware of issues ranging from fiscal and monetary policy to currency issues, and right now with the Russian invasion of Ukraine, geopolitical events have taken center stage. from the scene.
Few US-based companies have been more affected by the Russian invasion of Ukraine than Philip Morris International (PM).
Philip Morris International is a $137 billion company with operations around the world. The company has not operated in the United States since the split with Altria (MO) was finalized in 2008. The company primarily operates in Europe and Asia, with Indonesia and Russia being the company’s two largest markets. before the Russian invasion of Ukraine. The management of Philip Morris International is highly respected and this stock has been one of the best performing large cap stocks in the market over the past 3 years, consistently providing investors with both solid capital gains and solid income. during this period.
Prior to the Russian invasion of Ukraine, Philip Morris International had gone from around $60 per share in early 2020 to over $105 per share in January. The dividend is currently 5.6%.
The Russian invasion of Ukraine hit Philip Morris International in three main ways. First, Russia and Ukraine combine for around 10% of the company’s business, with Russia accounting for around 8% of the company’s global sales, 6% of company revenue and 10% of cigarette volume. and company sticks. Ukraine accounted for 2% of the company’s sales and 2% of the company’s cigarette and leaf stick volume.
Second, Philip Morris employs over 3,200 workers in Russia, and those factories have now been closed. Third, and less important but still relevant, the dollar has risen dramatically against the ruble, and the dollar has also risen significantly against most other major currencies such as the euro, which has also had impact on company profits. Currency movements are obviously more of a short-term concern for the company than the company’s need to suspend operations and investments in Russia and Ukraine indefinitely.
Philip Morris International has been very clear that the company has not permanently withdrawn from Russia or Ukraine, rather the company has temporarily suspended operations in Ukraine and management has suspended investments in Russia. The company operates a factory in Ukraine, with 1,300 workers. Management also said it would reduce operations in Russia, where the company has 3,200 employees. Philip Morris International continues to pay full wages to workers in both countries, and management said contingency plans exist to restart manufacturing in both countries when conditions are safer. The company also evacuated employees and helped them relocate to different countries to ensure their safety.
The key here is to assess whether or not the sanctions against Russia are designed to stop the invasion of Ukraine, or whether the sanctions against Russia are likely to be applied in the long term. Philip-Morris was very clear the company currently has no plans to pull out of Russia or Ukraine permanently.
Philip Morris’ core business remains strong and valuation looks reasonable at current prices even though operations in Russia and Ukraine remain suspended indefinitely, which looks unlikely. Russia and Ukraine only account for around 8% of the company’s current revenue, and although Russia has been an important and growing market, particularly for Philip Morris’ Heet stick products, that stock has already sold nearly 20% since Russia invaded Ukraine last month, and the company has yet to withdraw or permanently suspend its investments or operations in Russia or Ukraine.
The company’s recent strong earnings report also continues to show just how strong the company’s core business is. The recent report showed high single-digit revenue growth, gross margins above 36% and significant volume growth with the company’s key products, Heet cigarettes and sticks. These comparisons were year over year. Cigarette volumes were up 2.4%, while Heet stick volume growth was an even more impressive 17% year-over-year. The company’s strong margins also show Philip Morris’ pricing power with its high-end brands.
The best evidence suggests that the toughest sanctions on Putin and Russia will not be permanent. Europe still buys almost 40% of Russian oil exports, with Finland, Slovakia, Poland, Hungary and Estonia being the biggest importers of Russian oil. These countries do not have good short-term alternatives. Europe depends on Russia for around 40% of the continent’s energy needs, and so far most of Europe has not joined the US and UK’s call to ban the Russian oil, with England committing to stop buying Russian oil only after this year.
Philip Morris has a recession-proof business model and earnings continue to grow steadily at mid-digits. Margins and cash flow are also very impressive. The company’s core Heet Stick product is the superior product on the market, and Philip Morris has always been able to capture market share and increase prices with the company’s premium products and brands. is why the company continues to have leading margins of 36%.
Philip Morris is currently trading at just over 16 times next year’s earnings estimates, and management has been able to maintain the dividend in more difficult times than we are currently experiencing, when the European economy struggled between 2008 and 2012 with sovereign debt issues. Even if the company’s operations in Ukraine and Russia remain suspended for an extended period, this would represent a loss of almost 12% of the company’s revenue. For a company with multiple premium brands, high single-digit growth, and premium brands, a premium multiple is more than warranted and 16x forward earnings estimates aren’t expensive. The company’s 2-year price-to-earnings growth ratio isn’t expensive either, at 2.52. If the toughest sanctions against Russia are lifted over the next year and Philip Morris is able to resume trading in Russia and Ukraine, this stock will likely trade again at a multiple closer to 20. times next year’s earnings forecast, or just over $105 a year. to share.
Valuing intangibles is always difficult, and when widely held stocks like Philip Morris sell strongly, you’ll see forced liquidations and short sales that drive the stock price further down. Still, while the sanctions and recent currency swings are significant near-term headwinds for Philip Morris, that company’s core tobacco business remains very strong and the valuation looks cheap. Europe’s energy needs aren’t going anywhere either, and the continent will still need Russian oil and gas for some time to come. Philip Morris’ management team have proven they can navigate and manage the business effectively even during difficult times, as we saw between 2008 and 2012 when Europe faced a number of difficult credit and economic issues, and this company is built for the long haul.