Should You Flick Philip Morris International Into the Trash?

Tobacco heavyweight Philip Morris International is a favorite pick among many different types of investors. Income investors love it for its rock-solid yield, which currently stands at 4.3%. In addition, growth investors love the stock because it has access to some of the premier emerging markets across the globe where smoking remains very common.

While American members of Big Tobacco grapple with declines in smoking and an increasingly harsh view of cigarettes among the public and regulators, investors who feared this flocked to Philip Morris International. It makes a lot of sense, of course, because regulations against tobacco companies abroad typically lag those in the United States.

That all stands to change, however. Some key markets where Philip Morris International operates, such as the United Kingdom and Australia, are starting to turn against cigarettes.


This could deal a severe blow to Philip Morris International. In response, it's acquired a British e-vapor company to establish a foothold in electronic cigarettes. The company is following in the footsteps of Lorillard , which pursued a similar takeover of its own.

Nevertheless, the regulatory landscape may be shifting across the world when it comes to cigarettes, and that spells trouble for Philip Morris International.

Philip Morris International slashes its outlook
Philip Morris announced that it had acquired Nicocigs, an electronic cigarette company located in the United Kingdom. Phillip Morris did not disclose the deal price, but it's a considerable acquisition since Nicocigs holds a 27% market share in the U.K.

Philip Morris' standing in e-cigs will be boosted by its recently inked partnership with former parent Altria Group .

Philip Morris, which operates the Marlboro brand outside the United States, will provide Altria with two of its heated-tobacco products for distribution in America. In turn, Altria will license its e-cigarette products to Philip Morris for commercialization outside the United States. And the companies will continue to work with each other on future product improvements.

Collectively, these moves represent a clear attempt by Philip Morris to build an international presence in e-cigs. This move is very similar to Lorillard's takeover of SKYCIG last year, another U.K.-based manufacturer of electronic cigarettes. Lorillard already held a dominant position in the e-cig category thanks to its earlier acquisition of blu.

Because of these moves, Lorillard has a strong position in e-cigs. In the first quarter, Lorillard generated $51 million in electronic cigarette sales, and holds a 45% market share.

As strictly an international player, Philip Morris doesn't want to miss out on the tantalizing potential of growth abroad, where regulations are much more lax than they are in the United States.

At least, until now.

Separately, Philip Morris International reduced its full-year earnings outlook, strictly because of a tougher regulatory environment. This likely caught many by surprise, and the stock has taken it on the chin for the past few trading sessions.

The reason why this came as such a shock is that one of the bull cases for Philip Morris International versus its domestic counterparts is the lack of tobacco regulations abroad. That could all change, however, as Australia and England are both taking harsher views of tobacco.

For example, two years ago Australia implemented a "plain packaging" regulation that is designed to limit visual appeal and marketing for cigarettes. This has worked as planned, to such a degree that Philip Morris plans to leave the Australian market altogether by the end of the year.

Due to increasing scrutiny of cigarettes in some of its key markets, Philip Morris International cut its 2014 earnings forecast. The company now expects to earn $4.92 per share at the midpoint of its profit projection this year. That's a fairly significant reduction from its previous estimates. Its earlier guidance called for $5.14 per share in earnings.

The Foolish final takeaway
For the past few years, Philip Morris had been viewed more favorably than its domestic peers by many investors. That had to do with the easier operating conditions abroad. In the developing world, tobacco companies didn't face nearly as much public and regulatory scrutiny as U.S.-based cigarette manufacturers.

However, it appears that's starting to change. Major markets like the U.K. and Australia are taking harsher views of cigarettes, which means trouble for Philip Morris International.

Its acquisition of an international e-cigarette company is a good strategy for combating these effects. Philip Morris International's takeover, if nothing else, provides something of an insurance policy against public opinion shifting too quickly toward e-cigarettes.

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The article Should You Flick Philip Morris International Into the Trash? originally appeared on Fool.com.

Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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