Philip Morris International is one of the strongest businesses in our consumer defensive coverage. The company generates industry-leading operating margins in the low-40% range and boasts a wide economic moat with strong brand loyalty and cost advantages at its core. Nevertheless, we see room for execution improvement and we think margins could go even higher.
Philip Morris' profitability in emerging markets is a key differentiator against its competitors, and it has a strong presence in Asia. The advantage of selling in emerging markets is that volumes are more stable, and in some cases, increasing. Indonesia (where Philip Morris has about a 31% share), Turkey (about 45%), and the Philippines (about 90%) are all growing in volume at a low- to mid-single-digit rate as a more lax regulatory environment in those regions has led to higher levels of smoking initiation. This should help to slow the firm's decline in volumes over the next decade. The disadvantage of emerging markets is that on the whole, they are less profitable than developed markets. This is less true for Philip Morris International than it is for its competitors. It generated a 2013 EBIT margin of 43% in Asia, only modestly below the 44% group EBIT margin and 300 basis points above that of British American. The Asia segment margin is skewed by the firm's strong presence in the profitable Japanese market, but it also reflects Philip Morris' positioning in premium categories.
An opportunity for margin expansion lies in improving its operational efficiency, and we would like to see management focus on optimizing its manufacturing processes. Since its creation in 2008, the firm has consistently operated with less efficient asset turnover and cash conversion ratios than its competitors, despite its greater scale. We believe there is some fat to trim in the firm's cost structure, including consolidating manufacturing plants, which by bringing the firm's asset turnover ratios in line with competitors, we estimate could add a further $800 million or 200 basis points to the EBIT margin.
|Economic Moat||Fair value||Stewardship Rating|
Defensieve cons. goederen -
- With 28% global market share (excluding the U.S. and China), PMI is the largest publicly traded tobacco company in the world. This unmatched scale, customer loyalty to Marlboro, and its addictive products give the firm meaningful pricing power.
- PMI 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.
- There is a long-term trend of trading up in emerging markets, and Philip Morris is the best-placed of the international manufacturers to benefit.
- Plain packaging legislation is one of the few legitimate regulatory threats to Philip Morris' wide economic moat.
- With its revenue derived in foreign currencies and about one quarter of its input costs in dollars, a strengthening of the U.S. dollar can have a material impact on earnings growth.
- Although Marlboro is the only truly global cigarette brand, differences in tastes and preferences across geographies limit the economies of scale the firm can derive from the brand.
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