Altria Group Inc (MO): Is Philip Morris International Inc (PM) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Philip Morris International Inc. (NYSE:PM) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Philip Morris’ story, and we’ll be grading the quality of that story in several ways:

Growth: are profits, margins, and free cash flow all increasing?

Valuation: is share price growing in line with earnings per share?

Opportunities: is return on equity increasing while debt to equity declines?

Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s look at Philip Morris’ key statistics:

PM Total Return Price Chart

PM Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 24.7% Fail
Improving profit margin 17.9% Pass
Free cash flow growth > Net income growth 16.7% vs. 38.0% Fail
Improving EPS 59.6% Pass
Stock growth (+ 15%) < EPS growth 114.0% vs. 59.6% Fail
Improving return on equity Negative Equity Fail
Declining debt to equity Negative Equity Fail
Dividend growth > 25% 46.6% Pass
Free cash flow payout ratio < 50% 64.6% Fail

Source: YCharts.
*Period begins at end of Q4 2009.

How we got here and where we’re going
Despite frequent mentions as the best tobacco stock on the market, Philip Morris International Inc. (NYSE:PM) manages only three out of nine possible passing grades. This is a problem shared by its American counterpart, Altria Group Inc. (NYSE:MO) , which earned only two passing grades when it went through the same examination. In fact, smaller domestic tobacco stocks Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) both seemed to be better on a fundamental basis late last year than these two halves of the longtime Philip Morris empire.

Philip Morris carries a much larger debt load (nearly $23 billion) than Altria Group Inc. (NYSE:MO), and this number has been steadily rising in recent years — since Philip Morris’ spinoff, its debt load has grown 200%. That’s actually better than the growth in Altria’s debt, which is up nearly 600% over the same time frame. The cost of maintaining a high dividend yield can undermine a company’s long-term financial health, but Philip Morris has some wiggle room, should it decide that it’s time to pay down its obligations.