Three Factors That Could Positively Impact Philip Morris International

Philip Morris International (NYSE:PM) is a global tobacco manufacturer, selling in over 200 countries. In spite of difficult economic situations in some markets, increasing regulatory control over the sale of tobacco products, currency headwinds, and declining tobacco volumes, the maker of Marlboro has managed to deliver modest increases in revenues and EPS over the past few years. Under these circumstances, the stock price of the company has managed to grow by almost 80% in the last five years alone. However, in spite of this, demand for tobacco products has been steadily declining at 3-4% per annum, in response to which, tobacco manufacturers have looked to price increases to maintain profits. While this strategy cannot go on forever, a number of other factors could bode well for Philip Morris going forward.

Marlboro Poised To Continue Performing Well

First, although cigarette volumes declined in 2014, the fall at 3.1%, was less than half of that witnessed in 2013. ^[1] Even against the fall, Philip Morris managed to secure it’s position in a number of key markets, which include Algeria, Argentina, Austria, Canada, France, Germany, Italy, Korea, the Netherlands, the Philippines, Poland, Russia, Saudi Arabia, Spain, Switzerland, and the United Kingdom. The company’s key brand, Marlboro, has been performing well, especially in the European Union (EU) and Eastern Europe, Middle East & Africa (EEMA) regions, which saw share increases by 0.3 points. ((Philip Morris International Inc., Form 10-K, SEC))

The share increase was to a large extent aided by added extensions to the brand. This includes the roll-out of Marlboro 2.0 in 2014 across 26 countries, which “entails new pack designs and incorporates smooth tactile characteristics, blend adaptations, and new filter designs.” ^[2] With full roll-out by 2016, the brand could be instrumental in driving further share growth by pulling in the competition’s smokers especially among “adult smokers under 30 (ASU30).” While older smokers tend to have settled on a brand and display loyalty, ASU30 tend to demonstrate higher rates of switching and are more responsive to promotions and pricing strategies. It is for this reason that this group is often the target group for cigarette manufacturers, who increasingly try to consolidate their brands among these customers to ensure brand loyalty going forward. Brand extensions such as these could better Marlboro’s chance at gaining prominence among ASU30, who could be vital in securing shares for Philip Morris International going forward. ((Reynolds American/Lorillard: A Closer Look at Reynolds’ Arguments on Unilateral Effects, Head to Head Competition, The Capital Forum))

Philip Morris Has Other Promising Brands Up Its Sleeve

Second, apart from Marlboro, Philip Morris gained from other brands, too. In 2014, shipment for Parliament increased by close to 6%, against growth in almost all regions and notable share gains in Turkey and Russia. ^[1] Being a brand in the above premium category, Parliament was instrumental in driving margins in Eastern European countries, even more than Marlboro did. This stellar performance of the brand led Philip Morris to expand its sale to regions in the Middle East. Yet another brand that performed well was mid-priced Chesterfield, which also saw shipment increases at 22.6%, against growth in Italy, Poland, and Turkey. This goes on to show that the company has brands apart from Marlboro in its portfolio, which could also go on to benefit the company going forward.

Philip Morris Continues To Tap Other Sales Avenues

Third, apart from cigarettes, Philip Morris witnessed growth in its other tobacco products (“OTP”) category. This category includes tobacco for rolling purposes, pipe tobacco, cigars, and cigarillos. Sales in the category grew 3.4% in 2014, guided by better performance in the Czech Republic, Hungary, and Poland. ^[1] With cigarette prices increasing by the years, partly due to regulations and partly in order to recoup costs in the face of declining volumes, a cheaper alternative in the form of roll-your-own and make-your-own cigarettes may become more widespread. In this situation, Philip Morris could offset sales declines in the cigarette category to some extent through it’s OTP offerings going forward.

Apart from roll-your own tobacco, a more promising candidate when it comes to offsetting volume declines in conventional cigarettes are reduced-risk products or RRPs. In order to address the increasing health consciousness among people and the risks associated with conventional tobacco smoking, Philip Morris has diverted significant attention to the development of RRPs. Philip Morris uses this term to refer to “tobacco-containing products and other nicotine-containing products that have the potential to reduce individual risk and population harm in comparison to smoking combustible cigarettes.” ^[1] In this respect, Philip Morris launched a pilot program for iQOS, a smokeless cigarette that mimics an electronic cigarette, to some extent, late last year across Japan and Italy. The device uses tobacco refills, which essentials heats up to produce a tobacco-flavored vapor instead of burning to produce smoke and tar. ^[3] Further, the company has invested in other RRPs, which are presently at various stages of development. In a situation where conventional cigarette volumes are falling, such innovations may go on to become big winners for the company.

In spite of being in a challenging industry that is often under scrutiny by regulatory authorities and health advocates, we believe that Philip Morris still has a number of tools up its sleeve that could ensure steady performance. However, any and every strategy continues to remain vulnerable to policy changes, and the demand preferences of its consumers which could threaten prospects for the company.

We have a price estimate for Philip Morris of around $79, slightly lower than the market price.

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1. Philip Morris International Inc., Form 10-K, SEC [↩] [↩] [↩] [↩]
2. Philip Morris International’s CEO Presents at Consumer Analyst Group of New York Conference (Transcript) [↩]
3. Phillip Morris Launches New Type of Smokeless Cigarette [↩]