Stoking the Profit Flames

Broadcast #1,032

One of the most important questions we ask ourselves when choosing stocks for any of The Oxford Club portfolios is, “What are the long-term prospects for the business?”

It may seem obvious, but you’d be surprised how many people never consider this important question when looking at a prospective investment.

Our investment strategy is based on a sound fundamental principle: Invest in high-quality companies you can own for a very long time. Thus, understanding a company’s long-term perspectives is crucial to the strategy.

Pick the wrong one and you can kiss your chances goodbye. Choose wisely, and our track record proves that you have a good chance of being richly rewarded down the road.

Take Philip Morris International (NYSE: PM) in our Seven Deadly Sins Portfolio, for instance.

Created in a spin-off from the Altria Group (NYSE: MO) in March 2008, it’s the leading international tobacco company. Philip Morris controls a commanding 15.7% market share. And its trailing 12-month sales of $26.9 billion are greater than the next three of its competitors combined.

Its products can be found in over 160 countries, highlighted by the world’s biggest seller, Marlboro. Including that iconic brand, Philip Morris owns seven of the 15 most popular cigarette brands, like Virginia Slims, L&M, Chesterfield, Lark and Parliament.

But brand recognition isn’t the only thing Philip Morris has going for it.

The company is extremely well run and boasts the highest operating margin (43.2%) of any company in the tobacco industry. And healthy operating margins are essential to pay fixed costs and generate cash.

Speaking of cash, Philip Morris has plenty.

Current cash reserves at the end of September stood at $3.5 billion – nearly double those of the previous year.

Now, considering that tobacco companies are being pushed further into the corner as more countries tighten their smoking laws, a fair question is, “Can the company’s stellar performance continue?”

Even China, where the use of tobacco is barely prohibited, is starting to curtail the number of places that allow smokers to light up.

So far, Philip Morris, along with the other tobacco companies, has offset the drop in volume by raising prices. A pack of cigarettes routinely sells for over $8 a pack here, and can set you back over $10 abroad.

Price hikes aside, I expect the company’s acquisition strategy to keep adding market share.

Its latest acquisition was Rothman’s, Inc. of Canada. Other recent acquisitions include companies in Indonesia, Colombia and Serbia. It also bolstered its brands in Pakistan and Mexico.

So the answer to the above-posed question is, yes. The company’s stellar performance can – and should – continue.

Add in a 4.36% dividend yield and a very respectable price to earnings ratio of 15.6 and our “Sin” holding is worth a spot in any portfolio.

The fact that the euro is enduring another round of selling this week makes now a particularly attractive entry point.

As my colleague, Louis Basenese, recently noted, the currency declines are nothing more than “an annoyance” to this company with such compelling long-term prospects. So treat any dips as a buying opportunity.

Good investing,

David Fessler