Say what you will about sin stocks, but from an investment standpoint they have a number of appealing qualities. Cigarette companies focused on overseas sales, such as Philip Morris International (NYSE:PM), are a potentially addictive option for investors seeking income and stable business models in any economic environment.

IN PICTURES: Eight Ways To Survive A Market Downturn

Philip Morris lays claim to the international rights to Marlboro, which sets PM apart from peers such as British American Tobacco (NYSE:BTI) and its stable of secondary brands, including Kent and Lucky Strike. PMI's reported net revenues (which exclude excise taxes) fell 5.5% to $5.6 billion, with the strong dollar reducing sales by $697 million. Excluding currency fluctuations, revenues would have grown 6.3% on an impressive 28% improvement in the Latin America & Canada region, 9% growth in China and single-digit growth in emerging market countries in Eastern Europe, the Middle East and Africa.

Pricing Power
Quarterly cigarette shipment volumes were flat, but "favorable pricing" and strong shipment growth, such as a 100% jump in the Czech Republic, demonstrated that Marlboro has high and growing brand awareness across the globe. In general, tobacco firms have pricing power; U.S.-based Lorillard (NYSE:LO) is relying on price increases to stem a steady slide in the U.S.

Growing Demand
PMI is benefiting from growing demand and pricing power. Management is confident that organic growth will remain strong for 2009 and over the longer haul, and profitability also remains impressive. For the quarter, operating income was $2.37 billion for an operating margin of 42.3% on double-digit improvements (excluding currency movements) in every region except for the European Union, for 8.8% overall growth. Reported operating income fell 7% and diluted earnings ended up falling 6.3% to 74 cents per share.

Bottom Line
The strong dollar masked the extent to which sales are holding up during an acute economic crisis, which isn't all that surprising given that cigarette demand pricing is relatively inelastic and is on a secular upswing overseas. The overseas trends are in stark contrast to trends in the United States where Altria Group (NYSE:MO) is facing falling demand and ever-increasing federal taxes on every pack produced. Reynolds American (NYSE:RAI) is also struggling from a top-line perspective as analysts project full-year revenues will fall about 4%.

Philip Morris' profit margins also illustrate the extent to which it throws off excess capital, which it uses to fund a generous 5.8% dividend yield (as of April 23, 2009) and which it used to repurchase $1.3 billion in stock during the quarter. In the earnings release, management said to expect full-year earnings between $2.85 and $3.00 per share. That puts the forward P/E at under 13 times, which is quite reasonable given the stability of the business and sinfully-healthy growth prospects. (Read The Bottom Line On Margins, to take a deeper look at a company's profitability with the help of profit-margin ratios.)

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!