Tweedy Browne’s Top Stocks (Last Part): Philip Morris International (PM), Baxter International (BAX)

The Biggest Fast Growth Global Tobacco Company

Philip Morris International Inc. (NYSE:PM) is the sixth largest holding in Tweedy Browne’s portfolio. It owned more than 2 million shares in the company, with a total value of more than $170 million. Philip Morris accounted for 5% of the fund’s portfolio. Philip Morris, spun off from Altria Group Inc (NYSE:MO), is the largest global cigarettes and other tobacco products manufacturer in the US, and operates in more than 180 markets outside the US. Philip Morris is well known for its Malboro brand, the world’s best selling international cigarette, which accounted for around 33% of its total shipment volume in 2012. The majority of its revenue, 36.7%, was generated from Asia. Europe ranked second, accounting for 29.6% of the total revenue. Indeed, Philip Morris is expected to keep growing in the future, as it derives the majority of its revenue from emerging markets, where tobacco regulations haven’t been so strict yet. Altria, its ex-parent, doesn’t have such a wide moat as Philip Morris as it is operating solely in the struggling US tobacco industry, with strict regulatory control.

Philip Morris really is a cash cow, generating consistently increasing free cash flow. Since 2003, its free cash flow increased from $4 billion in 2003 to nearly $8.4 billion in 2012. At first glance, investors might be scared of the company’s negative equity and huge debt. As of December 2012, it had -$3.5 billion in total stockholders’ equity, $3 billion in cash, and nearly $22.85 billion in short and long-term debt. The reason for negative equity is that Philip Morris financed its significant share buybacks with debt. Since 2008, the treasury stock skyrocketed from $2.28 billion to nearly $26.3 billion.

With the current trading price of $91.75 per share, Philip Morris’ total market cap is nearly $153.3 billion. The market is valuing the company at 11.5 times EV/EBITDA. Altria is a much smaller company, with $67.2 billion in total market cap. With a current trading price of $33.55 per share, Altria is valued at 10.53 times EV/EBITDA.

Foolish Bottom Line

Between the two tobacco companies, I strongly prefer Philip Morris due to its dominating global market position, potential huge growth and reasonable valuation. Indeed, investors might invest in Baxter and Philip Morris and hold them for a long run. As Baxter and Philip Morris are paying dividend yields of 2.3% and 3.5%, respectively, those two stocks fit well in investors’ income portfolios.

The article Tweedy Browne’s Top Stocks (Last Part) originally appeared on and is written by Anh HOANG.

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