Ticker:
Sector:
Industry:
PM
Consumer Goods
Cigarettes
Recommendation:
HOLD
Pricing
Closing Price $49.30
52-wk High
$52.35 (10/20/09)
52-wk Low
$32.04 (3/5/09)
Market Data
Market Cap
Total assets
Valuation
EPS (ttm)
P/E (ttm)
$93.04B
$34.52B
RECOMMEDATION: HOLD
$3.24
15.21
Profitability & Effectiveness (ttm)
ROA
18.64%
ROE
95.98%
Part
Profit Margin 25.33%
Oper Margin 40.22%
Our fund is currently holding 600 shares of Philip Morris
Morris International, accounting for 2.58% of our portfolio. We
are investing in Philip Morris International which is not a
participant in the US smoking industry. This company offers
ability for global growth and is paying good dividends. Although
there are risks associated with strict government regulation
ANALYST
NAME
p
Anh Phan
Anpx93@mail.missouri.edu
regarding smoking, I don’t think that we should cut back on
our current position in this stock.
About Philip Morris International
PMI is an international tobacco company. The company along with its subsidiaries is engaged in
the manufacture and sale of cigarettes and other tobacco products in markets outside of the US.
PMI's products are sold in 160 countries. It has 58 manufacturing facilities in 32 countries. The
company operates in European Union, Middle East & Africa, Asia and Latin America.
The company operates globally, with manufacturing and sales facilities throughout the world.
The company’s product portfolio includes a range of blends and styles, across 150 distinct
brands and over 1,900 variants. PMI's leading brands include Marlboro, L&M, Philip Morris,
Bond Street, Chesterfield, Parliament, Lark, Merit and Virginia Slims. PMI owns seven of the
top 15 international cigarette brands worldwide, led by Marlboro.
In March 2008, PMI was spun-off from Altria Group and it started operating as an independent
company. The company owns the trademark rights for all its principal brands, including
Marlboro, in all countries other than the US. While, PM USA (a subsidiary of Altria owns the
trademark rights to its brands, including Marlboro, within the US, its territories and possessions.
The chart below gives an overview of PMI’s brand portfolio, as of the end of 2008:
The company has continuously increased its market share in markets around the world. As the
end of 2009, PMI’s market share in the OECD markets is roughly 34.9%, while that in the nonOECD market slightly increased to 21%.
In markets other than the US and China, PMI accounts for roughly 25.8% of the market share.
Although China has been a market targeted by tobacco companies for years with its 350 million
smokers, China national tobacco Corporation has a virtual monopoly over the Chinese market.
Currently, PMI’s top competitors are:
British American Tobacco plc
Imperial Tobacco Canada Limited
Imperial Tobacco Group PLC
Japan Tobacco Inc.
Reynolds American Inc.
Universal Corporation
Altadis SA
Philip
By geographic segment, although PM is trying to grow in the emerging markets, the EU is still
the largest market of the company, with roughly 49% of its revenues coming from this particular
region. Revenue breakdown by geographic regions : EU – 49%; Eastern Europe, Middle East,
Africa – 21% ; Asia – 21%; Latin America and Canada – 10%. However, PMI is growing
dramatically in emerging markets:
PMI’s 2009 financial results
Net revenues of $25.0 billion were down by 2.6% for the full-year 2009, due to unfavorable
currency of $2.6 billion. Excluding currency, net revenues increased by 7.5% for the full year,
driven by favorable pricing of $2.0 billion across all business segments, and the favorable impact
of the 2008 Rothmans Inc.,Canada acquisition, partly offset by unfavorable volume/mix of $620
million, primarily in the EU and EEMA Regions. Excluding currency and acquisitions, net
revenues increased by 5.3%.
PMI’s cigarette shipment volume of 864.0 billion units was down by 0.7% in 2009, as gains in
Asia, primarily driven by Indonesia and double-digit growth in Korea, and in Latin America &
Canada, from the acquisition of Rothmans Inc., Canada, were more than offset by declines in the
EU and EEMA, mainly due to the impact of the economic crisis, primarily in the Baltic States,
Spain and Ukraine. On an organic basis, which excludes acquisitions, PMI’s cigarette shipment
volume was down by 1.5%.
2009 FINANCIAL RESULTS BY REGIONS
EUROPE
In the EU, net revenues declined by 6.7% to $9.0 billion, mainly due to unfavorable currency of
$856 million. Excluding the impact of currency, net revenues increased by 2.2%, primarily
reflecting higher pricing of $520 million across most markets, which more than offset
unfavorable volume/mix of $372 million largely due to total market declines and to adverse
product mix. Excluding the impact of currency and acquisitions, net revenues increased by 1.5%.
PMI’s market share in the EU was down by 0.3 share points to 38.8%. Adjusted for the trade
Inventory movements in the Czech Republic, PMI’s market share was down by 0.2 share points,
as gains, primarily in Austria, Belgium and the Netherlands, were offset by share declines in
Germany, Italy, and Poland.
EASTERN EUROPE, MIDDLE EAST & AFRICA
In EEMA, net revenues decreased by 9.4% to $6.8 billion, due to unfavorable currency of $1.4
billion. Excluding the impact of currency, net revenues increased by 8.8%, driven by favorable
pricing of $820 million, primarily in Russia, Turkey and Ukraine, which more than offset
unfavorable volume/mix of $197 million. Excluding the impact of currency and acquisitions, net
revenues grew by 8.3%.
PMI’s cigarette shipment volume decreased by 1.5%, principally due to: Ukraine, which suffered
from the unfavorable impact of a series of tax-driven price increases that raised PMI’s prices by
between 38% and over 100% during the year, and worsening economic conditions; and PMI
Duty Free, primarily reflecting the unfavorable impact of the global economy on travel. This
decline was partially offset by strong cigarette shipment volume growth in Algeria, Egypt and
Turkey.
ASIA
In Asia, net revenues increased by 5.5% to $6.5 billion. Excluding the impact of unfavorable
currency of $41 million, net revenues grew by 6.2%, driven by favorable pricing.
PMI’s cigarette shipment volume increased by 1.1%, mainly due to gains in Indonesia and
double-digit growth in Korea. Shipment volume of Marlboro grew by 4.3%, reflecting a strong
market share performance across the region, particularly in Indonesia, Japan, Korea and the
Philippines.
LATIN AMERICA AND CANADA
In Latin America & Canada, net revenues increased by 14.7% to $2.7 billion. Excluding the
impact of unfavorable currency of $328 million, net revenues increased by 28.8%, primarily
driven by the 2008 Rothmans Inc., Canada, acquisition and higher pricing of $276 million.
Excluding the impact of currency and acquisitions, net revenues increased by 9.0%.
Cigarette shipment volume of 103.8 billion units increased by 4.4%, reflecting the Canadian
acquisition.
SWOT ANALYSIS
Strengths
Leading market position
PMI is the market leader and the second largest player in many international markets. It is the
leading international tobacco company, with ownership of seven of the world's top 15 brands
worldwide. PMI has leading presence in several countries including Russia, Germany, Ukraine
and Italy. Its brands, led by Marlboro and L&M, are sold in approximately 160 countries around
the world.
A strong market position allows the company to derive economies of scale in purchasing,
manufacturing and distribution.
Wide geographic presence
PMI has a wide geographic base. The company sells its products in 160 countries and has 58
manufacturing facilities in 32 countries. In addition, the company is well diversified in terms of
revenue generation from these geographies.
The diversified geographic presence would reduce the business risk for the company and makes
it resilient to significant weak performance from any of the region.
Strong brand equity
PMI owns some of the best recognized cigarette brands worldwide. Marlboro is the world's
preeminent cigarette brand. Marlboro is PMI's best asset and it is an important driver of longterm shareholder value. In the mature markets of continental Europe, for example, Marlboro is
the leading brand in nearly every major market and accounted for around 30% of the overall
revenues for the company.
Marlboro is the leading cigarette brand and is valued at $21,283 million in 2008.
Weaknesses
Lack of product diversification
PMI is wholly dependent on tobacco and tobacco-related products for generating revenues.
Contrary to the global trend of tobacco companies diversifying into other businesses, PMI has
not diversified into any other business segment. As a result, its revenues are highly vulnerable to
tobacco-related litigation across the world. PMI has faced number of litigations in the past with
international governments alleging that tobacco products intend to harm human life in general.
Damages claimed in some of the tobacco-related litigation range into billions of dollars. PMI has
been unable to effectively counter allegations that its products are carcinogenic and are causing
irreparable damage to human life. Lack of product diversification increases the business risk of
the company.
Tobacco related litigations
PMI faces significant governmental action aimed at reducing the incidence of smoking. It faces a
number of legal cases in which the plaintiffs are seeking substantial compensation for the
damage caused by tobacco products. There are presently 123 cases on Individual Smoking and
Health. The company could be held responsible for failing to inform consumers about the
adverse health effects associated with both smoking and exposure to environmental tobacco
smoke. Tobacco litigation could adversely affect the revenues and the profitability of the
company.
Opportunities
Growing Chinese and Indian markets
The Chinese and Indian markets provide a huge potential for tobacco manufacturers. The top 20
brands in China, the world's largest cigarette market, increased their combined cigarette sales at a
rate of 14.8% in 2008. Moreover, as a result of increasing income levels and health concerns
about smoking local, hand rolled high-nicotine cigarettes, manufactured cigarette volumes are
expected to increase in China. According to the Tobacco Board of India, production of cigarettes
in India rose 13% to 285 million Kg in 2008. Spending on food, drinks and tobacco is expected
to grow at a Compounded Annual Growth of 12.2% in India during the period 2008–11. Given
its strong position, PMI could benefit from growth opportunities in China and India.
Rising popularity of smokeless tobacco
In response to health concerns and lawsuits against the tobacco industry, a number of tobacco
manufacturers have launched 'snus', a form of smokeless oral tobacco. Snus is a pasteurized
tobacco product that resembles a small teabag. Markets with a strong smokeless tobacco tradition
include India, Algeria, Pakistan, South Africa, Sweden and Norway. In order to cater to the
growing consumer preference, the company launched Marlboro Snus, a smoke-free, spit-free
tobacco pouch product into the Dallas/Fort Worth area. Further In February 2009, Swedish
Match and Philip Morris International established an exclusive joint venture company to
commercialize Swedish Snus and other smokefree tobacco products worldwide, outside of
Scandinavia and the US. PMI could further explore the market for snus in other countries to
improve its performance and generate additional revenues.
Threats
Growing health consciousness
Due to increasing health concerns worldwide, there has been a general decline in the consumer
demand for tobacco products in markets worldwide. There has been a strong increase in the
amount of research linking active and passive smoking, which has led to an increase in
legislation designed to discourage smoking. There is strong evidence that suggests that tobacco
products contain carcinogens, leading to fatal diseases like cancer and heart disease in both
active and passive smokers.
Furthermore, Pfizer introduced an oral drug Chantix (varenicline), the first prescription
medication designed to aid individuals in stopping smoking. Chantix joins an already lengthy list
of smoking cessation products like nicotine-replacement patches and chewing gum. Increased
health consciousness is likely to reduce demand for PMI’s tobacco products and adversely affect
its top line.
Contraband and counterfeit cigarettes
PMI's cigarettes brands are threatened by the increased availability of contraband and counterfeit
cigarettes. Large quantities of counterfeit cigarettes are sold in the international market.
Approximately 10% of all cigarettes sold in the UK are believed to be contraband or counterfeit.
Since these cigarettes are cheaper (they are not taxed), an increase in the availability of such
illicit cigarettes could deprive the potential customers for the company. For instance, a survey
from Trading Standards North West found that 28% of 14 to 17 year olds had bought counterfeit
cigarettes. The company's Marlboro is the most heavily counterfeited international cigarette
brand. The increasing incidence of contraband and counterfeit cigarettes reduce revenues of the
company and damage its brand equity.
Increasing advertising restrictions
Advertising, promotion and brand building, which are critical to the tobacco industry, are facing
increasing regulatory obstacles across the globe. For instance, the EU's Advertising and
Promotion Act, adopted in 2002, prohibits the advertising and promotion of tobacco products.
This includes press, billboards, free distribution of samples, and in-pack promotion schemes.
Also, the Tobacco Advertising and Promotion Act ensured a total ban on sponsorship and brand
sharing in global events by tobacco companies. These measures may negatively impact the
company’s sales, as advertising is important in driving tobacco sales.
VALUATION
I completed a discounted cash flow analysis, which estimated the present value of the
Company’s future cash flows. Since PMI is just spun off from Altria Group in 2008, there is not
enough history data to evaluate the company’s Beta. I therefore used a discount rate of 10% to
be conservative. I believe the discount rate of 10% is appropriate.
I ran several models with growth rates for years 1-10 ranging from 5% in a conservative case to
10% for a more aggressive case. My base case utilized a growth rate of 7% for years 1-10. My
second stage growth rate is estimated to be 3%. Based on my analysis, I calculated a value range
of approximately $54.67 per share for Philip Morris International Corporation. At the time of
the analysis (2/23/2010), the Company’s shares were trading at $49.30, which means a little bit
undervalued.
CONCLUSION
Based on the above analysis, I believe that Philip Morris International is currently trading at the
appropriate level. As a result, I recommend that we hold our shares of PMI.