Better Buy: Philip Morris International vs. Coca-Cola
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Philip Morris International (NYSE: PM) and Coca-Cola (NYSE: KO) own some of the world's most iconic consumer staples brands. PMI's Marlboro is the most popular cigarette brand in the world, and Coca-Cola's namesake drink is the most popular soda.
But over the past 12 months, Coca-Cola's stock has stayed flat, while PMI's stock tumbled more than 30%. Both stocks underperformed the S&P 500's 14% rally, but investors clearly thought Coca-Cola was a better investment.
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I compared these two stocks last December, and thought that PMI's stronger growth rate, higher dividend, and lower valuation made it the better buy. I was clearly wrong, since I overestimated PMI's ability to deal with lower cigarette shipments and fresh regulatory headwinds. Let's take a second look at both stocks.
Understanding PMI and Coca-Cola
PMI's cigarette portfolio includes brands like Marlboro, L&M, Chesterfield, Philip Morris, Sampoerna A, and Parliament. It also sells iQOS "heated cigarette" devices, which heat instead of burn a "tobacco stick" to release vapor instead of smoke. PMI was spun off from Altria (NYSE: MO) in 2008 to become a fully overseas company, while Altria retained the tobacco giant's domestic operations.
PMI focuses on expanding in developing countries with high smoking rates and lax regulations. That strategy has hit speed bumps in recent years as countries started introducing more anti-smoking regulations. PMI also constantly raises its cigarette prices to offset lower shipments and boost its earnings growth. However, the rising dollar, excise taxes, and British American Tobacco's takeover of Reynolds American have become major headwinds.
Coca-Cola mostly sells concentrated syrup to bottlers. It retains investments in many of its bottlers -- which operate as separate companies -- via its Bottling Investments Group. Aside from its namesake brand, its beverage brands include Sprite, Fanta, Fresca, Minute Maid, Dasani, Powerade, Fuze, and Simply Beverages.
To counter the ongoing decline of soda consumption in many top markets, Coca-Cola has introduced more reduced-sugar and zero-calorie sodas and launched more teas, juices, energy drinks, and bottled water. It also owns a major stake in Monster Beverage. Like PMI, Coca-Cola remains vulnerable to a strong dollar, and soda taxes in several markets could throttle its growth.
How fast are PMI and Coca-Cola growing?
PMI's total cigarette and heated tobacco unit shipments fell 3% in 2017, and its international market share (excluding the U.S. and China) dipped 10 basis points to 28%. Yet its revenue, excluding excise taxes, rose 8% to $28.7 billion. On a constant currency basis, revenue would have risen 9%.