Selling PM at a Wonderful Price

Yesterday I closed out my position in Philip Morris Inc (PM) with a net gain of 31% including dividends. I still believe the tobacco industry is an excellent place to be due to an addictive product resulting in a very inelastic demand curve helping big tobacco to grow revenues despite shrinking cigarette volumes. Further little CAPEX requirements pave way for robust cash flows in the industry.

Nevertheless, at some price even the best business becomes an attractive sell. As of yesterday PM traded at around 25x earnings and 20x FCF, which is considerably higher than multiples demanded by the company in the past. Average P/E ratio over the past 5 years was 17. Going forward an investment in PM at a share price of about 102 is nothing to get excited about for an investor seeking to outperform the market. Returns in the future will likely be subpar (in case there is no unexpected dollar weakness).

Unfortunately selling PM means foregoing precious dividend income, unless I can replace the holding with an equally high yielding investment. However, traditional high yielding investments have become more and more expensive because of income hunting investors in ZIRP/NIRP times. Hence, I will likely refrain from chasing high yielders and focus more on small-cap opportunities that promise healthy capital appreciation.

By selling PM my portfolio became even more concentrated around core holdings such as IBM. Allocating more capital to my cheapest holdings (e.g. RICK) would therefore deter further from my goal of holding stock of at least ten different companies. In case share prices of RICK and the like do not fall significantly, which would make them almost irresistible, I will try to spread out my newly available capital to a minimum of two new names.


19 thoughts on “Selling PM at a Wonderful Price

  1. Maybe you should take a look at Neopost or Restaurant Geoup. They offer value and dividends. Without dividends Gruppo MutuiOnline might be a nice pick.


  2. Heyo Nachbar 😉
    I quickly went over the thread. Looks like something worth digging deeper. What I would be concerned with is declining same store sales as of late. However, the valuation seems to have priced in a lot of desaster going forward.
    Do you also have more info on Neopost SA?
    Gruß nach BadCannstatt


    1. Hey Nachbar,
      It looks really interesting – and the valuation is quite cheap for a company that has a interesting history.
      Here is some information on Neopost: There are also some interesting article on seeking alpha.
      On my way looking for Neopost I also found some other companies, that are quite interesting:
      I think I have to stop for now ;).
      Grüße aus Cannstatt


      1. Thanks for the input. As it seems Neopost is a bet on whether or not they can replace shrinking revenue in their core “mail business” with new revenues from growth initiatives. Reminds me of IBM, only that currency is a tailwind in the case of Neopost, which gives the company some room to maneuver. Also Neopost is cheaper, just wondering how sticky their sales are.

        I have yet to look into the other ideas.

        Have you ever had Baidu on your agenda. Chinese Searchgiant? Looks very compelling after recent regulatory issues.



        1. You are welcome!
          You are right with your comparison. Neopost is cheaper and was traded if it would go bancrupt. But it’s still a good, but shrinking business.

          I did take a look at Baidu. It’s a interesting company, but I didn`t look deeper at it, cause Alphabet is atm also at an interesting value and I am a trying to have a relative small amount of chinese stocks – I already have BYD and LVMH (which has a big china exposure).



          1. Do you see a nearterm inflection point in constant FX revenues at Neopost? If not i am concerned about lacking catalyst to give mr. market a reason to grant the company a higher earnings multiple.

            About Baidu. From what I read so far its current earnings, especially from search, are depressed because of high expenses in their O2O business. However it seems iQiyi will be sold off to a consortium consisting of Robin Li, the founder of Baidu, among others. This should sent margins upward and make the company a lot cheaper than Google. But I share your concerns with owning Chinese equity. China is essentially a black box for business. Regulation can change the whole picture overnight.


  3. I haven`t calculated it, but I think the shrinkage will continue for some time. In comparison to the peers Francotyp Postalia and Pitney Browns Neopost looks also cheap.

    But maybe Gruppo Mutuionline or Burberry are better investments. Sorry. I am full of ideas ;).

    Your research on Baidu looks very interesting. I would love to read a post on Baidu – but China and its debt problem still worries me.


    1. Awesome to see that there is still value in the market. I´m really struggling to find appealing ideas. Will have a further look at all the names when I find the time.

      I´ll try to do a writeup of Baidu. Can´t tell when though. The annual reports are a tough read. Some 30 pages alone on risk factors.
      Concerning Chinese debt I cannot judge how much of a systemic risk this presents. The pain is in low quality shadow bank debt i´ve heard. What comforts me is China´s influential government body that has wide controls over the market. I doubt that they would passively stand by and watch institutions fail and kill the wealth of millions of retail investors. But this is just speculation. It certainly doesn´t harm to limit China exposure.


  4. Yes. There is! At the current price I would take a first look at Gruppo Mutuionline: They are under pressure by the Italian bank market, but their business modell and management are quite interesting.

    I would love to read your writeup on Baidu.
    But this piece on China gives a big warning signal:–22218904/.

    Do you know if there is an value investment circle in Stuttgart – or are you also an lonesome investor?


      1. Yes. It is quite comparable to Hypoport.

        Would be interesting to maybe try to create something like a topic related (stocks, sectors, methods) monthly Stammtisch – for the future.


    1. Hey ebdem,

      Cheers. This goes very much in line of what I think of the company. Search is a huge cash printer. But profitability is under pressure from investments in their various other ventures. On a standalone basis Search could very well deliver FCF of around USD 4-5 bn, implicating the that the search business is available for around 11 to 14 times earnings at todays price. Given that this is a business that has in the past generated growth rates of about 40% annually the company is a steal.

      What concerns me are the recent regulatory struggles. Baidu is now required to restructure search i.e. showing less sponsored ads in their findings. Management however, indicates that this is a 2-3 quarter problem only before things will normalize again. Further BAIDU is a lavish spender and it is unsure if we´ll ever see the profitability of search shining through in financial statements. In the past months efforts have been made to dispose of some Non-core business like the iQyi a Chinese Youtube counterpart. But the buyout of CEO Robin Li didn´t go through, probably because it undervalued the iQyi. (Governance issues oho!!)

      So, a lot of red flags here that cloud an otherwise excellent investment opportunity.

      At this point I am not really sure what to make of the company. I might very well end up purchasing a few shares since prices have fallen quite substantially mitigating some of the mentioned risk factors.


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