Before The Mega Merger: Here’s A Look At How Philip Morris Stands In Comparison To Altria

by Trefis Team
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Altria Group, Inc.
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After Philip Morris (NYSE: PM) was spun off from Altria (NYSE: MO) in 2008, it has successfully grown its business at a much faster rate than its former parent. Though both companies offer similar products, what distinguishes them is the size and geographic presence. PM has become much larger than Altria as it caters to a larger consumer base spread across Europe, Latin America, Africa, Canada, and Asia, whereas Altria sells its products mainly in the US. Additionally, increased regulatory hurdles and litigation in the US (which was the primary reason for the spin off) has hampered Altria’s growth.

You can view the Trefis interactive dashboard – Altria v/s Philip Morris: Comparative Analysis – to understand how key metrics for the two companies compare with each other and how are they expected to perform. In addition, here is more Consumer Staples data.

A] Total Revenue Trends

  • Altria revenues have seen a net increase of $3 billion from $16.6 billion in 2009 to $19.6 billion in 2018.
  • Philip Morris’ revenues saw a much greater increase of $6.6 billion, from $23 billion in 2009 to $29.6 billion in 2018.
  • PM has increased its lead in size over Altria, in terms of revenue base, from $6.4 billion in 2009 to $10 billion in 2018.
  • Though both companies saw their revenue base grow, Altria’s revenue has largely increased at a steady rate, whereas PM saw a lot of volatility in revenues over recent years.
  • This was mainly due to the presence of smokeless products in Altria’s portfolio since over a decade, which offset any decrease in cigarette consumption. PM being a pure cigarette player, did not have this buffer until 2016.
  • However, impressive growth in PM’s heated tobacco products since 2016 has led to revenue growth, with PM expected to increase its revenue base lead over Altria to $11 billion by 2020.

a) Smokeable Tobacco Products Division – Volume and Revenue

  • Both companies have seen a decline in cigarette sales over the last 10 years, as people are moving away from combustible products.
  • For Altria, the volume decline has been about 38.6 billion units from 2009 to 2018, whereas for PM the fall in volume sales has been much more at 123.7 billion.
  • Despite a larger drop in volume, Philip Morris’ cigarette sales are still over 6.6x that of Altria’s, due to a much larger market reach.
  • In line with industry trends, cigarette volume is likely to continue to see a decline for both tobacco giants going forward
  • Notwithstanding declining volume trends, both companies have seen a net increase in revenues from smokeable products for the period between 2009 and 2018, as they resorted to price increase to mitigate the effect of lower shipments.
  • Altria witnessed a net increase of $2 billion (13%) while Philip Morris saw a net increase of $2.5 billion (11%) in segment revenues.

b) Smokeless Tobacco Products Division – Volume and Revenue

  • Altria has been an early entrant into the smokeless products category, with its offerings such as Copenhagen and Skoal, whereas PM ventured into the heated tobacco space as recently as in 2016.
  • Despite being a late entrant, PM’s heated product units sales are significantly higher in comparison to Altria’s smokeless products.
  • In 2018, Altria sold 0.8 billion units of smokeless tobacco products, whereas PM sold close to 41.4 billion units, which is almost 50x that of Altria’s volume sales.
  • Such a vast difference is mainly due to the geographies they cater to – Altria sells its smokeless products in the US and hence is subjected to regulatory hurdles and long procedures, whereas PM successfully expanded globally with very high demand for heated tobacco in Japan and Europe.
  • Altria’s volume growth would be driven by investment in JUUL, which is a market leader in the US, whereas the recent FDA approval for IQOS is likely to drive volume growth for Philip Morris over the next two years.
  • Altria has increased its smokeless products revenue by $0.7 billion from 2009 to 2018, whereas PM has seen its segment revenue base increase by $3.4 billion in just two-year period (2016 to 2018).
  • Though Altria charges a higher rate per unit sold, significantly higher volume has led Philip Morris to record much better revenues, which is expected to improve further with sale of IQOS in the US.

B] Philip Morris Emerging Winner In Smokeless Tobacco Space

  • Philip Morris adopted commercialization of its heated products in 2016, when the category contributed 2.7% to its total revenues, whereas for Altria, which was offering smokeless products even before the spin off, the segment contributed 9.9%.
  • However, within a year, PM was able to surpass Altria in the smokeless / heated tobacco segment, with the revenue contribution increasing to 12.7% and 13.8% in 2017 and 2018, respectively.
  • The share for Altria remained at 10.9% in 2018.
  • The JUUL acquisition and IQOS sales in the US is expected to see the segment share rise for both companies, with PM maintaining a comfortable lead.

C] Conclusion

  • Thus, Philip Morris has emerged as the larger player compared to Altria post the spin off.
  • With the ongoing talks of the possibility of a new PM-Altria merger, there is speculation in the market that PM might end up with a larger stake, close to 59%, in the combined entity, owing to its much larger customer base, significantly higher volume, and historical and potential revenue growth.

As per Philip Morris Valuation by Trefis, we have a price estimate of $94 per share for PM’s stock. As per Altria Valuation by Trefis, we have a price estimate of $57 per share for Altria’s stock.

 

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