Philip Morris International (PM)

Source from:  Forbes 10/09/2014

Below are key drivers of Philip Morris International's (PMI) value that present opportunities for upside or downside to the current Trefis price estimate for Philip Morris International:

Philip Morris International Revenue per Cigarette in Europe and Asia and EEMA and Latin America & Canada - We currently estimate revenue per cigarette to annually increase by 5-6% in its various geographical segments. If however, the increase in each segment is half of our current estimate because of higher excise duties and lower pricing,it would imply a 10-12% downside to the Trefis price estimate.

BUSINESS SUMMARY

Philip Morris International is a leading international tobacco company, encompassing eight of the world's top 15 international brands which includes Marlboro, the number one cigarette brand worldwide. Until the spin off in March 2008, Philip Morris International was an operating company of Altria Group. The newly independent Philip Morris International sells tobacco products in international markets while Altria maintains its operations in the US.

After the spin-off, PMI has become the world's leading international tobacco company and the third most profitable international consumer goods company. While US sales revenues have been in decline as Altria struggles to cope with higher state tobacco tariffs and the tobacco industry's negative image in the US, international sales continue to grow for PMI. Its portfolio has a wide range of premium, mid-price and low-price brands, which include both international and local brands.

In addition to selling Marlboro branded cigarettes (the world's highest volume cigarette brand), PMI also has seven of the top ten brands by volume globally such as L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, A Mild, and Morven Gold which is sold throughout Europe, South America, Africa and Asia.

In 2009, PMI acquired Swedish Match South Africa to gain a stronghold in the smokeless tobacco category. In 2010, Philip Morris Philippines Manufacturing Inc. (PMPMI), an affiliate of PMI, united with Fortune Tobacco Corporation (FTC) to create a new company PMFTC in the Philippines, with both PM and FTC holding an equal share.

The four divisions of Philip Morris International consist of the following four regional segments -

Europe

East Europe, Middle East and Africa (EEMA)

Asia

Latin America & Canada

Philip Morris International largely serves "discriminatory consumers", who are concerned with where the tobacco was grown and the quality of the product they are purchasing with brands like Marlboro, L&M, Parliament, Philip Morris, and Chesterfield. The firm also maintains a portfolio of three value company brands (Bond Street, Red and White and Next) for the "value consumers" who are more concerned with the price of tobacco products. It also owns local brands such as A Mild and Diji Sam in Indonesia, Diana in Italy, and Assos in Greece, to take advantage of established brands as opposed to marketing new brands in some regions.

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.

KEY TRENDS

Declining tobacco consumption

Volume of tobacco products sales have been declining due to growing health consciousness amongst people about the extreme health risks of smoking. Governments have also been discouraging tobacco consumption through high excise duties and legislative controls like 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 legislations

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 cigarettes consumption. Legislations like those banning smoking in public places lead to a reduction in cigarette sales. Proposed bills for disclosure in different countries and those mandating plain (generic) packaging for tobacco products in (like Tobacco Plain Packaging Bill, 2011 in Australia) result in the expropriation of tobacco companies trademarks.

The WHO Framework Convention on Tobacco Control ("FCTC") enforced since 2005 with more than 171 signatory countries including the European Community, establishes a global agenda for tobacco regulation with several measures for the purpose of reducing initiation of tobacco use. This is expected to lead to a decline in demand.

Philip Morris' share repurchase program

PMI's strong cash flow has led to the firm conducting share repurchases. The firm has so far repurchased 449.4 million shares using more than $28 billion since 2009 till the end of 2013. In April 2010, it completed its 2008-2010 share repurchase program of $13 billion and in May 2010 it initiated a new three-year share repurchase program of $12 billion. The company plans to buyback shares worth $4 billion in 2014.