What’s Driving Our Valuation Estimate For Philip Morris International’s European Union Operations
Philip Morris International’s (NYSE:PM) is a leading international tobacco company with its products sold in more than 180 countries worldwide. Until its spin-off in March 2008, it was an operating company of Altria Group (NYSE:MO). Excluding the U.S. and China, the company holds more than 28% of the total international cigarette market, which is led by its flagship brand Marlboro.
Our price estimate for Philip Morris International is based on the sum of estimated values of its individual divisions. These divisions are based on the company’s geographic break down of its consolidated financial and operating results. According to our estimates, Philip Morris International’s tobacco sales in the European Union (EU) contribute around 26% to its total value. Here, we take a closer look at some of the key value drivers for the division and the key challenge to its future growth.
We currently have a $79/share price estimate for Philip Morris International, which is ~15.2x our 2014 full-year diluted EPS estimate of $5.20 for the company.
- IQOS Helps Philip Morris Navigate Well In Q1
- Should You Pick Philip Morris Stock After 7% Fall This Year And Q4 Miss?
- Will Philip Morris Stock Rebound After A 10% Fall This Year?
- After 8% Drop This Year, Pricing Growth To Bolster Philip Morris’ Q3
- Pricing Gains To Drive Philip Morris’ Q2?
- Does Philip Morris Stock Have Upside Potential To Its Pre-Inflation Peak?
See Our Complete Analysis For Philip Morris International
Key Value Drivers
- Leading Market Share Position: Philip Morris International holds the leading market share position in the EU cigarettes market. During the first quarter of this year, the company’s volume market share in the EU stood at ~39%. In other words, Philip Morris International sells almost 1 in every 2.5 cigarettes sold in the EU. More importantly, it dominates the premium market, which has higher margins and makes up around one-third of the total cigarettes market in the EU. The company’s world-famous Marlboro brand holds ~20% share of the total EU cigarettes market and more than 55% share of the premium segment. [1]
- Highest EBITDA Margin: According to our estimates, Philip Morris International earns the highest adjusted EBITDA margin on its cigarette sales in the EU. The company’s adjusted EBITDA margin in the EU stood at around 53.3% last year and we expect it to increase to 54% in the long run. This is primarily because of higher average cigarette prices in the region. According to our estimates, Philip Morris International earns net revenue (excluding excise taxes) of almost $0.05 per cigarette in the EU, which is more than 30% above the company-wide average. [2]
- Favorable Currency Translation Effect: Philip Morris International sells cigarettes in more than 180 countries. Since the company operates primarily in local currency in these markets, weakness in the local currency against the U.S. Dollar negatively impacts its financial results. Most international currencies, especially the emerging market currencies, have weakened significantly against the U.S. Dollar since the second half of 2013 when the U.S. Federal Reserve started scaling back its bond-buying program. However, the Euro (EUR) has remained relatively stable against the U.S. Dollar over the same period because of similar inflationary expectations. Going forward, we expect the EUR to moderately strengthen against the U.S. Dollar over the next couple of years based on our relative purchasing power parity analysis. On the other hand, a similar analysis for Philip Morris International’s other key markets like Russia and Indonesia indicates that local currencies in these markets would continue to remain under pressure in the medium to long term. Relative purchasing power parity relates the change in two countries’ expected inflation rates to the change in their exchange rates. However, among other things, it assumes that there are no trade barriers and transportation costs, which is not always the case. But it does give a good directional sense of long-term currency exchange rates. We use expected inflation rates from PWC’s economic projections to analyze relative purchasing parity between two countries. The below table summarizes our exchange rate estimates for USD/EUR, USD/RUB, and USD/IDR. [3]
Key Challenge To Growth
- Faster Volume Decline: The biggest challenge faced by Phillip Morris International and all other tobacco companies in the EU is the rapidly declining cigarette sales volume in the region. According to the company’s recent CAGNY presentation, total legal cigarette sales volume in the EU declined by 7.5% y-o-y last year, compared to just 2-3% decline in cigarette sales in Asia and Eastern Europe, the Middle East and Africa (EEMA) regions. This has been primarily due to increasing excise taxes, high unemployment rates due to weak macroeconomic conditions, the growing prevalence of illegally traded cigarettes and shifting consumer preferences towards other tobacco products (OTP). We expect Philip Morris International’s shipment volume to the EU to continue to remain under pressure, as we do not see these trends easing drastically in the short term. [1]
See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Notes:- Philip Morris International Inc. (PMI) Presents at the 2014 CAGNY Conference, pmi.com [↩] [↩]
- Philip Morris International SEC Filings, sec.gov [↩]
- Global Economy Watch, pwc.com [↩]