Philip Morris International is a cash-generating machine. The company, which generates industry-leading operating margins and returns on invested capital, boasts a wide economic moat that is fortified by a bevy of powerful brands, a global manufacturing and distribution system, and an addictive product. While the company, which competes in 180 countries, has seen dwindling demand in some mature markets, Asia has served as a key driver for growth.
Overall PMI's cigarette volumes grew by 1.3% in 2012, led by 4.7% volume growth in Eastern Europe and 4.2% growth in Asia. We are impressed with the company's ability to steadily gain share. Given that the company's current stock price is slightly below our fair value estimate, we view the firm's new share repurchase program as a solid use of capital, and believe that the stock would make an attractive portfolio holding.
|Economic Moat||Fair value||Stewardship Rating|
Defensieve cons. goederen -
KEY INVESTMENT CONSIDERATIONS
- African and Asian markets are underpenetrated and present Philip Morris with long-term growth opportunities. The firm offers primarily premium products, so it should be able to exploit the uptrading trend in these markets, consequently generating superior long-term margins.
- Although the company consistently faces headwinds caused by regulation, taxation, and litigation, it has steadily grown profits since separating from Altria.
- The company has regularly returned cash to shareholders, and should continue to do so. We regard its dividend payout as safe, and expect the company to routinely repurchase its shares.
- With almost 29% global market share (excluding the U.S. and China), Philip Morris International is the largest publicly traded tobacco company in the world. Additionally, the company's addictive products enable the firm to possess meaningful pricing power.
- Philip Morris owns the international rights to Marlboro, the iconic global cigarette brand, and the strength of its product portfolio makes the firm the price leader in many international markets.
- With a focus on premium products, the firm has benefited from consumers' desires to trade up. And its operating margins above 40% are higher than those of its peers.
- Despite having a presence in approximately 180 countries, Philip Morris still believes that it can grow in markets such as India, Vietnam, and Bangladesh through population growth and market share gains.
- The firm has entered into joint ventures with China National Tobacco to market Marlboro in China, and Swedish Match to market snus in the EU. Philip Morris would be well positioned to exploit any lifting of trade restrictions in these markets.
- Governmental excise tax increases, additional regulation, or reduced consumer demand could have a negative impact on Philip Morris' cigarette volumes. Higher excises taxes in the Philippines during 2013 should have a negative impact on volumes in that country.
- Philip Morris generates 30% of its revenue from the European Union, where volumes have been falling by about 6% per year. Additional economic uncertainty and austerity measures could further affect European cigarette volumes.
- With its revenue derived in foreign currencies and some of its input costs in dollars, a strengthening of the U.S. dollar could hinder Philip Morris' financial performance.
- Tobacco companies are attractive targets for lawyers. Although Philip Morris International has never lost a tobacco-related case, there is a possibility that the company could have large legal bills in the years to come.
- Some governments are looking to mandate plain packaging for tobacco products. Should such legislation occur, the value of the company's brands could be diminished.
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