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Investment Overview for Philip Morris International (NYSE:PM)
WHAT HAS CHANGED
- Price hikes in a number of markets to combat declining volumes
- The tobacco industry, in general, is a declining one, where volume declines have been a regular feature. Between 2013 and 2014, while the overall market size declined 2%, volumes sales for Philip Morris International declined 3%. In order to combat the declining volumes against increasing regulatory control, excise hikes, and increasing health consciousness among people, Philip Morris hiked prices by about 2% in the year.
- Innovations could drive volumes and ensure shares
- While pricing has always been a key strategy to maintain profits, Philip Morris has channeled resources to ensure volume growth as well.
- 2014 witnessed a series of innovations and new launches in a number of key markets. This includes the launch of Marlboro Clear Hybrid (a regular to menthol capsule product), Marlboro Fusion Blast (Menthol product), iQOS (Reduced Risk Product), Dji Sam Soe Magnum Blue (machine-made Kretek product), to name a few.
- The introduction of these new products could allow Philip Morris International higher volume sales as they gain a higher share of the market.
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 cigarette 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 (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. In 2014, the company repurchased shares worth $3.8 billion. On account of the volatile currency environment, the company has decided to take a call on share repurchases in 2015 only later in the year.
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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