Philip Morris International (NYSE:PM) and Altria (NYSE:MO) are two of the largest players by market capitalization in the U.S. tobacco industry. Until a spin-off in March 2008, Philip Morris International was a part of the Altria Group. But after the split as the Trefis models show, both the companies have fairly distinct business models in terms of product focus and diversification. While Philip Morris focuses on geographical diversification by selling cigarettes in over 200 countries, Altria focuses on product diversification by selling smokeless tobacco products and wine alongside cigarettes. As we take up a comparative analysis of these companies we would be focusing on top line growth parameters like market share and market size for now.
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- What Impact Will A Decline In Smokable Products Volume Have On Altria’s Revenue?
- What Can Lead To A 10% Downside In Altria’s Valuation In The Next Few Years?
- Which Is A Better Dividend Bet – Altria Or Philip Morris?
Altria: Cigarettes and smokeless products together make up for approximately 85% of Altria’s stock price as per our estimates, and in both these segments the company holds around 50% of market share in the U.S.. Brand loyalty of consumers in the segment reduces the price elasticity of demand, which means lower impact of price hikes on demand for their products. Moreover, since most price hikes are industry wide, it is hard for one company to overcome market share of another player significantly. Hence, we expect Altria to continue to maintain its market share in the U.S. for both cigarettes and smokeless products.
Philip Morris: Philip Morris International has shown great performance in the Asian markets of Japan, Philippines, Korea and Indonesia in terms of capturing market share, and there is still a huge potential for the firm to grow due to the huge market size in Asia.
We expect the market share of Philip Morris to increase to 35% in the region, over the Trefis forecast period, with major gains in South Korea, Indonesia and potentially Japan. In European markets, the company has suffered a setback where due to the recessionary conditions there has been a shift towards cheaper brands. Also the growth of illicit trading could potentially lead to a decline in Philip Morris’s market share in the region.
Although Altria holds a handsome market share in the U.S., the overall size in terms of sales volumes is far smaller for Altria as compared to Philip Morris. This essentially means comparatively lower potential of top line growth for Altria. Moreover, due to increasing health consciousness, legislative controls and restrictive marketing rules, the overall volumes are seen to decline in the U.S.. Philip Morris International on the other hand has an increasing market in Asia due to comparatively more relaxed regulations and growing volumes in most markets of the region. Below is a snapshot of our forecast for the volumes of cigarettes market in Asia:
Overall, we feel that Altria would largely depend upon the performance of its smokeless products and wine as the cigarette market in U.S. is expected to shrink in size over time. The introduction of electronic cigarettes in its product range could potentially be an opportunity for Altria to further diversify its offering. For Philip Morris, we believe that the way it manages to capture additional market share in Asia is going to be the key for the firm’s performance in the long run. Growth in Asian markets however could get tougher with time, as increasing health consciousness and stricter legislative norms, like in the U.S. would gradually slow down the growth in market size for tobacco products in the region.