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Investment Overview for Philip Morris International (NYSE:PM)
Below are key drivers of Philip Morris International's (PMI) value that present opportunities for upside or downside to the current Trefis price estimate for Philip Morris International:
Philip Morris International Revenue per Cigarette in Europe and Asia and EEMA and Latin America & Canada - We currently estimate revenue per cigarette to annually increase by 5-6% in its various geographical segments. If however, the increase in each segment is half of our current estimate because of higher excise duties and lower pricing,it would imply a 10-12% downside to the Trefis price estimate.
Philip Morris International is a leading international tobacco company, encompassing eight of the world’s top 15 international brands which includes Marlboro, the number one cigarette brand worldwide. Until the spin off in March 2008, Philip Morris International was an operating company of Altria Group. The newly independent Philip Morris International sells tobacco products in international markets while Altria maintains its operations in the US.
After the spin-off, PMI has become the world's leading international tobacco company and the third most profitable international consumer goods company. While US sales revenues have been in decline as Altria struggles to cope with higher state tobacco tariffs and the tobacco industry's negative image in the US, international sales continue to grow for PMI. Its portfolio has a wide range of premium, mid-price and low-price brands, which include both international and local brands.
In addition to selling Marlboro branded cigarettes (the world’s highest volume cigarette brand), PMI also has seven of the top ten brands by volume globally such as L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, A Mild, and Morven Gold which is sold throughout Europe, South America, Africa and Asia.
In 2009, PMI acquired Swedish Match South Africa to gain a stronghold in the smokeless tobacco category. In 2010, Philip Morris Philippines Manufacturing Inc. (PMPMI), an affiliate of PMI, united with Fortune Tobacco Corporation (FTC) to create a new company PMFTC in the Philippines, with both PM and FTC holding an equal share.
The four divisions of Philip Morris International consist of the following four regional segments –
- East Europe, Middle East and Africa (EEMA)
- Latin America & Canada
Philip Morris International largely serves "discriminatory consumers", who are concerned with where the tobacco was grown and the quality of the product they are purchasing with brands like Marlboro, L&M, Parliament, Philip Morris, and Chesterfield. The firm also maintains a portfolio of three value company brands (Bond Street, Red and White and Next) for the "value consumers" who are more concerned with the price of tobacco products. It also owns local brands such as A Mild and Diji Sam in Indonesia, Diana in Italy, and Assos in Greece, to take advantage of established brands as opposed to marketing new brands in some regions.
Most tobacco and cigarette businesses today follow a Price-Profit First Strategy and enjoy significant room for strong net pricing and margin expansion. With declining cigarette sales, Philip Morris International's revenues and profits are maintained through higher pricing, which is a key driver of its performance.
Philip Morris International benefits from significant geographic diversification, with good exposure to emerging markets which have high growth and developed markets which have higher operating margins.
Declining tobacco consumption
Volume of tobacco products sales have been declining due to growing health consciousness amongst people about the extreme health risks of smoking. Governments have also been discouraging tobacco consumption through high excise duties and legislative controls like bans on public smoking and strict restrictions on the advertising and marketing of tobacco products and compulsory health warnings.
High excise duty on tobacco products as well as proposed anti-tobacco legislations
State and local governments tax tobacco products for both revenue and public health purposes. Such excise taxes are at times as high as 30-80% of revenues for cigarettes in different countries. Regular excise tax increases or unfavorable changes in the tax structure lead to increases in cigarette prices and a fall in demand.
Governments also resort to anti-tobacco legislation and anti-smoking laws to discourage tobacco and cigarettes consumption. Legislations like those banning smoking in public places lead to a reduction in cigarette sales. Proposed bills for disclosure in different countries and those mandating plain (generic) packaging for tobacco products in (like Tobacco Plain Packaging Bill, 2011 in Australia) result in the expropriation of tobacco companies trademarks.
The WHO Framework Convention on Tobacco Control (“FCTC”) enforced since 2005 with more than 171 signatory countries including the European Community, establishes a global agenda for tobacco regulation with several measures for the purpose of reducing initiation of tobacco use. This is expected to lead to a decline in demand.
Philip Morris' share repurchase program
PMI's strong cash flow has led to the firm conducting share repurchases. The firm has so far repurchased 449.4 million shares using more than $28 billion since 2009 till the end of 2013. In April 2010, it completed its 2008–2010 share repurchase program of $13 billion and in May 2010 it initiated a new three-year share repurchase program of $12 billion. The company plans to buyback shares worth $4 billion in 2014.
Trefis Forecast Rationale for Philip Morris International Market Share in Asia
Philip Morris International's Market Share in Asia is the ratio of the volume of cigarettes sold by Philip Morris International to the total volume of cigarettes sold in Asia every year.
Philip Morris International's market share in Asia jumped to 24.2% in 2010 from 19.7% in 2009 with the merger of Philip Morris International and Fortune Tobacco Corp in the Philippines. In 2011 and 2012, the market share grew further to 26.5% and 27.3% respectively. However, in 2013, the company's market share in Asia declined to just 25.8% as it lost significant ground to its prime local competitor in Philippines.
Going forward, we expect the market share to decline further in the short term but increase gradually to around 26.5% by the end of the Trefis forecast period with major gains in South Korea, Indonesia and potentially Japan.
Trefis considered the following factors for its forecast
- Growth prospects in Japan
- In the aftermath of the earthquake and tsunami in Japan, cigarette sales of Japan Tobacco(JT), the Japanese market leader, suffered significant supply disruptions. Damage to two production facilities hit almost a third of its production until June 2011. Philip Morris International and British American Tobacco witnessed significant market share growth during this period. Philip Morris International's shipment volume grew by 24% whereas the total market size shrank by 10.8% in Japan in 2011.
- The successful new launches during 2010 such as the Marlboro Ice Blast menthol cigarettes, which achieved more than a 1% market share within 6 months, is expected to help Philip Morris grow market share in the Japanese menthol cigarettes segment. This segment constitutes almost 20% of the total cigarettes market size in Japan.
- PMI-FTC (Fortune Tobacco Corporation) merger in Philippines
- In 2010, Philip Morris International merged with Fortune Tobacco Corporation to form a new company called PMFTC that is expected to control 90 percent of the Philippines tobacco market. By merging with one of the five largest privately owned tobacco companies in the world, PMI's presence in the Philippines is expected to expand to include the low and mid-priced segments.
- In spite of a 4% decline in the total cigarette consumption in the country in 2011, Philip Morris International's volume grew by 7.5% in the country in 2011.
- However, the fact that Philip Morris held more than 90% market share in Philippines, sharp decline in total cigarette volumes in the country driven by the sin tax law is expected to negatively impact Philip Morris' market share in 2013 and slow down its growth trajectory going forward as well.
- Market share gains in Korea
- Philip Morris International has been witnessing strong growth in South Korea, led by the Marlboro and Parliament premium brands. Shipment volumes grew by 100% between 2006-2010 and market share doubled from 8.5% in 2006 to 19.8% in 2011. In 2012, the company cut the price of its Virginia Slim cigarettes by 14% to extend its market share in the country. Philip Morris International is also constructing a new production facility in Yangsan which will be fully operational by 2012.
- Growth prospects in the large Indonesian market
- The Indonesian cigarette market constitutes approximately 25% of the Asian cigarettes market by volume. PMI occupies more than a third of Indonesia's market and ties up with local heritage brands like Sampoerna A and Dji Sam Soe to maintain a broad and deep product portfolio to compete effectively across all price segments. PMI's shipment volume increased by 16.6% in 2011 and is expected to witness a growing or stable market share over the coming years.
- Vietnam venture
- Effective January 2011, Philip Morris International has established a new business venture with the Vietnam National Tobacco Corporation (Vinataba), which will allow it to continue to build its brands in Vietnam.
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- Anti-tobacco legislation
- Legislations for ingredient disclosure and a ban on smoking in public areas in different countries may hurt cigarette sales. The Tobacco Plain Packaging Bill in Australia, which was recently approved by the country's Supreme Court, requires all cigarette companies to sell their products within the country in generic olive-green packs with large graphic warning labels. This will cause erosion of brand value for the cigarette companies, and can lead to a substantial reduction in sales and market share. Further, governments of other countries, such as India, Canada and the U.K. are keeping a close watch on the bill, and may implement similar measures in their countries as well.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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