The Marlboro men go global

By Michael Brush

Once upon a time, the Marlboro Man rode alone on his horse across a rugged Western landscape.

Now, with smoking increasingly unpopular in the U.S. and Europe, he has to circle the globe to rustle up smokers. Look where he's been spotted in emerging markets:

• The Marlboro Man is busy learning Chinese, preparing to win over an emerging middle class in China, the world's biggest cigarette market.

• He's in India, Pakistan and Bangladesh, persuading workers with rising incomes to trade up from the lowly bidi, a popular smoke made from tobacco wrapped in a leaf, known for its fruity flavoring and potent kick.

• In Mexico, he's greeting youngsters with a warm "Hola!" to build market share.

All of this will wind up being bad for the health of smokers in these parts of the world. But for investors, it's positive, particularly since the Marlboro Man's international sponsor, Philip Morris International (PM, news, msgs), was just spun off from U.S. cigarette maker Altria (MO, news, msgs).

Investors can now profit from a clean play on the all-but-guaranteed success of the Marlboro Man as he wins over emerging middle classes around the world.

"The U.S. has seen a secular erosion in cigarette sales, declining 2% to 4% a year, but that is not at all the case globally," says Charles Norton, the manager of the Vice Fund (VICEX), which owns shares of Philip Morris. "The world is a tremendous growth opportunity. Philip Morris has plenty of room to increase its market penetration internationally. There is a real growth story."

Besides wooing smokers around the globe, Philip Morris International plans to increase prices and cut costs. Soon it will buy back stock aggressively.

Together, these tactics should lift profits by 12% a year over the next five years, on annual sales growth of 4% to 5%. That's the forecast of Goldman Sachs (GS, news, msgs) analyst Judy Hong. She thinks these trends will drive this "must own" tobacco stock to $60 a share in a year. (The stock closed at $50 on Tuesday.)

Throw in an annual dividend of $1.84 per share (for a 3.7% yield), and the result should be healthy returns for anyone who buys now at $50 -- and doesn't mind owning a company that sells a product likely to send its users to their graves early.

Confirming the bullish outlook, insiders purchased $30 million worth of the stock three weeks ago, just after it spun out. (Philip Morris International officials declined to comment for this article, citing a quiet period after the spinoff.)

What's in a name?

Of course, Altria was simply called Philip Morris until 2003. But at the time, the company also controlled popular food brands such as Kraft, Ritz and Oscar Mayer. Smoking foes suggested the company concocted the innocuous new name to play down its tobacco business.

Now Altria is chiefly a U.S. tobacco company again. Altria spun off most of its food businesses as Kraft (KFT, news, msgs) last year. Its main business, Philip Morris USA, remains the largest cigarette company in the country.

• MSN Health: 20 ways to stop nicotine cravings

Philip Morris' long history includes the creation of one of the most successful ad campaigns in history -- the one featuring the Marlboro Man, a rugged cowboy with cigarette in hand. The ads stopped in 1999, but the rugged Marlboro image remains. And Marlboros are still the most-smoked cigarette in the world.

China lights up

Marlboro’s move into China will take years, but it could ultimately be the biggest piece of the story for investors. Here's why: China has 350 million smokers, including 60% of the men there. Each year, they puff on 2.3 trillion cigarettes, or about two-fifths of the cigarettes smoked around the world, according to JPMorgan Chase (JPM, news, msgs) tobacco sector analyst Erik Bloomquist.

The obstacle for foreign companies is that China's state-run tobacco company, Chinese National Tobacco, has a monopoly on the market. For the new Philip Morris International, however, this shouldn't be a problem, because it signed a joint venture agreement with the state-run company in 2005. So far, the deal hasn't led to sales in China; any Marlboros on the market there are counterfeit or smuggled.

Philip Morris has been faithfully holding up its end of the deal by selling Chinese cigarettes outside the country. The payday should come late this year or soon after as it begins selling its brands in China, predicts Tom Russo of Gardner Russo Gardner, an investment shop in Lancaster, Pa. "Patience will be rewarded," he says.

Norton agrees: "Over the next decade, China will dramatically change the growth profile of Philip Morris. That is a huge driver that hasn't taken hold yet. China is key."

But because investors expect infiltration of China to happen slowly, the change is not yet fully priced into Philip Morris stock. That makes it a kind of "free option on the world's largest and hitherto untapped tobacco market," Bloomquist says.

How can anyone be sure that Marlboro and other Philip Morris brands will be popular there? Three reasons. First, there are already lots of fake Marlboros on the market there, which verifies demand. Next, China has literally hundreds of cigarette brands, with no single one holding more than a 5% market share. There's no single competitor for Marlboro.

Continued: A global juggernaut

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