Philip Morris International Earnings Preview: Asia to Drive Top-Line Growth

by Trefis Team
-7.66%
Downside
85.55
Market
79.00
Trefis
PM
Philip Morris International
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Philip Morris International (NYSE:PM) is set to announce its Q1 results on April 19, 2012. Once again we expect Asia to drive the company’s top-line growth. Margins should improve due to the periodic price increases globally. The stock has climbed more than 10% since the start of the year buoyed by positive results in the previous quarter and a general stock market optimism. Philip Morris International competes with British America Tobacco (AMEX:BTI) and Imperial Tobacco Group (LSE:IMT), among others.

We have a $96 price estimate for Philip Morris International, which is about 10% higher than the market price.

Asia to lead the pack

Asia contributes 42% to Philip Morris International’s stock price per our estimates. Some of the most popular cigarette brands owned by the company are Marlboro, L&M, Bond Street, and Parliament. Philip Morris has been able to consistently increase its market share in Asia driven by strong customer loyalty and strategic decisions that vary from country to country. For example, in South Korea, the company has decided to cut the price of its Virginia Slims by 14%  to better compete with the region’s dominant player KT&G. [1]

Tobacco companies generally follow different strategies for developed and developing countries. Increasing health concerns combined with rising excise duties have resulted in cigarette volumes to decline in developed countries. Hence tobacco companies are increasing their prices periodically to compensate for the dwindling volumes.

In developing countries, the tobacco companies usually resort to competitive (or sometimes predatory) pricing to increase their market shares. Apart from Korea, the company slashed its cigarette prices by 40% in 2011 in Senegal to compete against the local, cheaper brands.

The market size is showing positive growth in developing markets helped by rising incomes and tobacco consumption becoming a part of lifestyle of a growing number of people. Moreover, consumers are willing to upgrade from local cigarette brands to more globally acclaimed brands (the kind of brands in Philip Morris International’s portfolio). However, the general trend worldwide has been an increase in the prices of cigarettes which should see the company enjoy higher revenues and improved margins.

See our complete analysis of Philip Morris International

Notes:
  1. Philip Morris slashes superslim cigarette prices in Korea, news.asiaone.com, April 13, 2012 []
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