Philip
Morris:
Vene, Vidi, Vici
By Joseph McKittrick
Investment Quality Trends
In
1919, Philip Morris (MO $55) adopted the company motto
"Vene, Vidi, Vici." These famous words attributed to
Julius Caesar translate as "I came, I saw, I conquered."
In the last 83 years, MO has fulfilled is motto. Although the
company is best known for its tobacco products (which control
over 50% of the U.S. market), it also has made significant moves
into other industries.
In 1989, Philip Morris
acquired Kraft and General Foods and combined them
to form Kraft General Foods. The newly combined entity became
the largest food company in the U.S. and helped to increase MO
earnings by 26% within the first year. In 2001, domestic food
segment revenues actually surpassed domestic tobacco revenues
by $322 million. In 2000, Philip Morris purchased Nabisco,
Balance Bar, and Boca Burger. Among the exhaustive
list of recognizable names in the Kraft line: Post Cereals,
DiGiorno Pizzas, Maxwell House Coffee, Kool-Aid, and even
Oreo cookies.
Although Kraft General
Foods was created by Philip Morris, some confusion may arise
over the offering of Kraft stock under the symbol (KFT). After
the acquisition of Nabisco, the decision was made to offer
less than 20% of Kraft General Foods in an IPO. The proceeds
from this offering were used to reduce debt incurred from the
purchase of Nabisco. So although a limited amount of stock
in Kraft is available to the public, Philip Morris continues
to own 83.9% of the company and control 97.7% of the combined
voting power of all Kraft common stock.
The second largest
segment of Philip Morris revenue comes from its tobacco business.
With over 18 individual brands of cigarettes, it is the country's
leading cigarette manufacturer. Although various liabilities
have been well-publicized in recent years, their full extent
has not yet been fully established. Through a number of notable
cases brought by both government and private individuals the
company has been assessed several different sums of financial
damage. Thus far the company has in large part managed to have
these damages either reduced or overturned on appeal. In 1998,
the company along with other tobacco companies signed onto the
"Master Agreement" with 46 states and 5 territories.
Over the course of the next 25 years, the agreement will limit
various forms of marketing, as well as mandate payments of $200
billion to the States. Because growth in this segment has been
primarily due to increasing domestic tobacco prices rather than
new consumers, it remains unclear whether the segment can continue
to sustain its former prowess.
MO's final major business
segments are its beer and financial services operations. Through
its Miller Brewing Company, MO operates the second largest
brewer in the U.S. Notable brand names marketed under this label
include Miller, Miller Lite, Red Dog, Foster's Lager,
and Olde English 800 malt liquor.
For 2001, income in this division demonstrated an impressive 26.0% increase to $650 million. Among the most profitable of MO's business is its financial services offerings. In 2001, although the division brought in only $435 million in revenue, it accounted for $296 million in total operating income.
Interesting Qualities to Note
1.
Revenue Mix: Tobacco 61%, Food 33%, Beer 5% and Financial Services
1%
2. Philip Morris controls
50% of the domestic cigarette market share.
3. Dividends have been
paid since 1928.
4. MO has 175,000 employees.
5. FMR Corp owns 7.16%
of common stock and officers/directors own 1%.
6. Telephone: (212)
880-5000, Internet: http://www.philipmorris.com
When MO is priced to
yield 6.0% as it was in 1993, 1994, 1995, 1999 and 2000, it is
Undervalued and a buy should be considered. However, when it
is priced to yield 2.8%, as it was in 1991, 1992 and 1998, it
is Overvalued and a sale is recommended. Philip Morris now is
in the Rising Trends category at a recent price of $55 and is
yielding 4.2%. Based on the current dividend of $2.32, there
is an upside potential of 51% to an Overvalued price of $83.
It should be noted however that there is a 30% downside risk
to an Undervalued price of $39. Even so, with a higher than average
dividend yield and a remarkable history of annual dividend increases,
MO merits investment consideration. Philip Morris is one of I.Q.
Trend's "Lucky 13" stock recommendations.
Editor's Note:
Investment Quality Trends, 7440 Girard Avenue, Suite #4, La
Jolla, CA 92037; 1 year, 24 issues, $310.
