Weekly Tobacco Notes: Altria And Philip Morris

In our weekly tobacco note, we focus on the Altria Group (NYSE:MO) and Philip Morris International (NYSE:PM). The states of New York and Washington are mulling new proposals to prevent young people from smoking, while Philip Morris is facing a similar situation in the U.K. It has also slashed its prices in South Korea to gain greater market share.

Washington And New York Policies Threaten Altria

New York Governor Andrew Coumo has submitted a proposal to regulate e-cigarettes more intensely. This proposal was part of the $141.6 billion budget that he submitted. The proposal aims to bridge the gap between the regulation of e-cigarettes and their traditional counterparts. All the areas where traditional cigarettes are banned will also be made e-cigarette free as well. Taking note of the increased popularity of such devices in recent years, the Governor said that this trend undermines the state’s efforts at reducing youth tobacco use. This could prove a setback to Altria’s ambitions of using the nascent industry of e-cigarettes to make up for its declining cigarette sales (See Altria’s Potential In The E-Cigarette Market and Trends That Impact Altria). ^[1]

Another proposal to restrict tobacco sales came from Washington state Attorney General Bob Ferguson. This proposal seeks to raise the legal age for buying and/or smoking tobacco and e-cigarettes from 18 to 21. The stated objective of this legislation is also the reduction in the adoption of smoking by young people. ^[2]

We have a price estimate of $44 for the Altria Group, which is about 20% below the market price. We have estimated revenues net of excise tax of $17.7 billion, a little less than the analyst consensus estimate of $17.8 billion.

U.K.’s Plain Packaging Law

A legislation mandating the use of plain, unbranded packages for sales of cigarettes may come into force in England as early as May 2016. The Government said it would put the proposal to vote in March 2014. Perhaps as an acknowledgement of the controversial nature of the issue, the proposal will be put up for a free vote. A free vote, also known as a conscience vote, is one where the political parties do not dictate an official party line. The E.U.’s tobacco products directive also comes into force in 2016. This will require cigarette packs to cover 65% of their surface area with graphic health warnings (See Why Did Philip Morris Spend More Than Anyone Else Lobbying The E.U.?). ^[3]

Philip Morris Korea Reduces Prices

Philip Morris has decided to reduce the price of its cigarettes by 4.25% in South Korea. This brings their prices on par with domestic brands. Industry analysts believe this is part of the fierce competition for market share in the South Korean cigarette market. ^[4]

We have a price estimate of $80 for Philip Morris, slightly below the market price. Our revenues net of excise estimate for the company in 2014 is $29.9 billion, which is the same as the analysts consensus estimate.

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1. Coumo Backs Bans [↩]
2. Washington Could Raise Smoking Age [↩]
3. Government Plain Packaging Plan [↩]
4. Philip Morris Korea Lowers Price [↩]