VALUATION HIGHLIGHTS

1. European Union constitutes 42% of the Trefis price estimate for Philip Morris International's stock.
2. SSEA, CIS & MEA constitutes 25% of the Trefis price estimate for Philip Morris International's stock.
3. EA, AU & PMI DF constitutes 20% of the Trefis price estimate for Philip Morris International's stock.

WHAT HAS CHANGED?

1. PM Stock Performance
   • PM stock has seen little change, moving slightly from levels of $85 in early January 2021 to around $90 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

     Overall, the performance of PM stock with respect to the index has been quite volatile. Returns for the stock were 15% in 2021, 7% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that PM underperformed the S&P in 2021 and 2023.

2. Q4 2023 Performance
   • The company reported net revenue of $9.0 billion in Q4 2023, marking a rise of 11% over the prior-year quarter, driven by a 6% rise in heated tobacco unit volume. Adjusted EPS came in at $1.36, up 12% y-o-y.

3. Recent Acquisitions
   • Phillip Morris, in 2022, acquired Swedish Match – best known for its oral nicotine products. Although Philip Morris sells its products outside the U.S., Swedish Match generates over 60% of its sales from the U.S. market.

     Earlier in 2021, Philip Morris acquired Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. Last year, the company consolidated these entities, and it now reports its sales in a separate segment - Wellness & Healthcare.

4. Impact of Coronavirus
   • PM stock dropped over 28% from levels on January 31, 2020, when the World Health Organization (WHO) declared a global health emergency in the wake of the coronavirus, to its March 2020 lows of $60. Tobacco stocks are generally viewed as good defensive bets through such crises. Lower consumer spending and supply constraints led to a drop in stock price. However, as global lockdowns were gradually lifted, consumer spending picked up, aiding the company's sales growth, especially of IQOS.

5. Price hikes in a number of markets to combat declining volumes
   • The tobacco industry, in general, is a declining one, where volume drops have been a regular feature. In order to combat the falling volumes against increasing regulatory control, excise tax hikes, and increasing health consciousness among people, Philip Morris resorts to raising cigarette prices in a majority of its key markets.

6. Innovations could drive volumes and ensure share gains
   • Philip Morris has seen soft cigarette volume trends for the past few quarters, due to a general shift away from tobacco products, amid accelerating prices of cigarettes and worldwide anti-tobacco campaigns.
   • Keeping this in mind, the company has undertaken significant investment to expand its reduced-risk products (RRPs) range, in particular, iQOS -- a black pen-shaped device that heats a Marlboro-brand ‘heatstick' containing tobacco instead of burning it.
   • Strong performance of the company's reduced risk portfolio (RRPs), notably HeatSticks and iQOS devices, helped push the company's growth. The HeatSticks volume reached 109 billion units in 2022. The volume could have trended even higher without the capacity restrictions earlier, which forced the company to limit the iQOS device sales and the impact of the pandemic on the supply chain.
   • In most countries where iQOS is launched, the company received a favorable tax treatment for heatsticks, as compared to cigarettes. This enabled it to price it lower than cigarettes in certain markets, such as Switzerland.

BUSINESS SUMMARY

Philip Morris International is a leading international tobacco company with a wide range of premium, mid-price, and low-price brands, comprised of international as well as local brands. Until the spin-off in March 2008, Philip Morris International was an operating company of Altria Group. The independent Philip Morris International sells tobacco products in international markets, while Altria maintains its operations in the U.S.

PM's cigarettes are sold in many countries, and it has a market share of at least 15% in more than 100 markets. Their portfolio of international and local brands is led by Marlboro, the world's best-selling international cigarette, which accounted for approximately 10% of the international cigarette market in 2022. Marlboro is complemented in the premium-price category by Parliament. The other leading international cigarette brands are Bond Street, Chesterfield, L&M, Lark, and Philip Morris. The company also owns a number of important local cigarette brands, such as Dji Sam Soe, Sampoerna A, and Sampoerna U in Indonesia; Fortune and Jackpot in the Philippines; Belmont and Canadian Classics in Canada; and Delicados in Mexico.

In addition to the manufacture and sale of cigarettes and other tobacco products, PMI is engaged in the development and commercialization of Reduced-Risk Products (“RRPs”). RRPs is the term PMI uses to refer to products with the potential to reduce individual risk and population harm in comparison to smoking traditional cigarettes.

The six divisions of Philip Morris International consist of the following four regional segments and two new businesses:

• European Union
• Eastern Europe, Middle East, and Africa (EEMA)
• Asia
• Latin America and Canada
• Swedish Match
• Wellness & Healthcare

SOURCES OF VALUE

Strong Pricing

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.

Geographical Mix

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.

Reduced Risk Products (RRPs)

PM's leading RRP brand, IQOS, is a precisely controlled device into which a specially designed heated tobacco unit is inserted and heated to generate an aerosol. The company markets its heated tobacco units under the brand names HEETS, HEETS Marlboro, and HEETS FROM MARLBORO, defined collectively as HEETS, as well as Marlboro HeatSticks and Parliament HeatSticks.

KEY TRENDS

Declining tobacco consumption

The volume of tobacco products has been declining due to growing health consciousness among people about the extreme health risks of smoking. Governments have also been discouraging tobacco consumption through high excise duties and legislative controls such as 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 legislation

Tax regimes, including excise taxes, sales taxes, and import duties, can disproportionately affect the retail price of cigarettes versus other tobacco products, or disproportionately affect the relative retail price of their cigarette brands versus cigarette brands manufactured by certain competitors. Because their portfolio is weighted toward the premium-price cigarette category, tax regimes based on sales price can place the company at a competitive disadvantage in some markets. 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. Legislation, like banning smoking in public places, leads to a reduction in cigarette sales. Proposed bills for disclosure in different countries and those mandating plain (generic) packaging for tobacco products result in the expropriation of tobacco companies' trademarks.

Significant regulatory developments have taken place in recent years in most of the markets, driven principally by the World Health Organization's Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation. The FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and attractiveness of tobacco products to adult smokers.