Description:
Philip Morris International (PM) enjoys a premium position in the tobacco market. Of 15 worldwide cigarette brands, it is the owner of 7 brands, including Marlboro, Chesterfield, Parliament, Bond Street, etc. The company’s key differentiator compared with other tobacco companies is that it operates globally in 180 countries.
Since the mid-90s, the company has experienced lower product demand in the developed markets. There are a number of factors for this: higher health awareness among consumers, higher taxes, and generally lower consumer spending on staples (as a percentage of available income).
In emerging markets however, the firm holds a dominant market position and it is expected it will maintain and expand this status in the near future. The company has identified a number of countries with above average growth potential. These countries are (not an exhaustive list): India, Bangladesh, Vietnam, and China, where it operates through a joint-venture with China National Tobacco.
PM has one of the lowest, if not the lowest, unit production cost. Over the past few years, average revenues per unit excluding excise taxes have grown by about 6% annually. This achievement of high operational efficiency, together with the company’s financial leverage and financial discipline, makes it an attractive investment opportunity for long-term investors.
Historically, the company has one of the best combinations of income and growth in the mega-cap consumer staples segment. This premium position is one of the key drivers behind its industry-leading operating margins, which are in excess of 42%. EPS growth is constant (2014: 12%) and so is the dividend payout ratio. The company returns available cash to investors in two ways: share repurchases (for 2013, 2015 and 2015: USD 10 billion) and dividend payments (annually about USD 5.5 billion with a payout ratio of 65%. The present dividend yield a striking 3.9%). Given the operating and financial ratios, most of the time the company is traded, at a discount to its peer group.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- PM holds 7 brand names, among them the key brand “Marlboro”; this gives the company excellent pricing power,
- Operating margins are in excess of 42%, which is well ahead of the competition,
- Excluding the Chinese and US markets, PM holds about a 30% market share of worldwide tobacco sales,
- The company is very strong financially and returns capital to investors by means of regular share repurchases and constant dividend increases,
Weaknesses:
- Due to higher government taxes and economic slowdowns in Europe and Asia, further unit output decreases are to be expected in the years ahead,
- The sector consistently faces higher regulatory hurdles, excise taxes, and litigation risks. While the last is periodical, increasing regulations and taxes are permanent and impact the sales growth over time,
- PM generates about 30% of its business in Europe. Coupled with a stronger USD, this market share is becoming a major problem for PM,
- Plain packaging (monochrome) for cigarettes, if imposed by governments, should push consumers to the low-priced brands,