Philip Morris International’s (NYSE:PM) stock has climbed in 2012 driven by its strong full-year earnings and overall optimism in the macro-economic environment. We believe there is further upside to the stock as the company continues to perform impressively in Asia. As per our estimates, Asia contributes more than 40% to the company’s stock price. Customer loyalty is high for cigarette brands and with names such as Marlboro, L&M, Bond Street, and Parliament in its portfolio, the company can surely leverage its brands to tap the opportunities offered by this region. Philip Morris International competes with British America Tobacco (AMEX:BTI) and Imperial Tobacco Group (LSE:IMT), among others.
We have a revised $96 price estimate for Philip Morris International, which is about 10% higher than the market price.
Asia To Drive PM Higher
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Firstly, Asia is the only region where the market size continues to grow. Indonesia is an attractive market with its market growing by close to 9% in 2011 and 4% in 2010. In absolute terms, the country alone consumes one-fourth of the cigarettes in Asia. In India too, the consumption of tobacco has traditionally been in forms other than cigarettes. With incomes rising quickly in the country and people adopting more western lifestyles, consumers are taking up cigarettes as the preferred choice of consumption of tobacco.
We expect the revenue per cigarette in Asia to rise from $0.066 in 2011 to $0.086 by the end of Trefis forecast period. Inflation is usually higher in developing countries, so it is easier to justify a price increase.
Moreover, excise taxes (as a percentage of revenues) are still low compared to other regions which ensures higher profitability for the company. Besides, regulations are relatively lax in Asian compared to Western countries, and with strong lobbying, the tobacco companies can ensure it takes a long time before taxation rates start approaching those in the developed world.
For 2011, the excise tax in Asia, as a percentage of revenue, was 45.4% compared to 69.1% in Europe. For East Europe, Middle East and Africa (EEMA), the corresponding figure was close to 55%.
EEMA is another attractive region for the company. Cigarette volumes have been flat for the past few years, while the company has been able to grow its market share. EEMA contributes around 24% to the stock price, as per our estimates.