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 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. We are impressed by PMI's ability to steadily gain share.
We think PMI has some sustainable competitive advantages. It owns 7 of the leading 15 international cigarette brands, including Marlboro, Parliament, Chesterfield, and Bond Street. It is the dominant player in the European Union and holds leading positions in much of Eastern Europe, the Middle East and Africa, and Asia. The firm is well balanced between developed and emerging countries. Philip Morris' strong market share positions, which give the firm economies of scale, and premium positioning of products have been the primary drivers behind industry-leading operating margins, which have been consistently above 40%.
Philip Morris' exposure to emerging markets is a key differentiator for the firm versus other tobacco companies, such as Altria, Reynolds American, and Lorillard, which are focused on the U.S. market. Many other markets in Asia, Africa, and Eastern Europe have growing populations and looser restrictions on tobacco marketing. This, combined with rising incomes, should result in growing unit volume for PMI over the next decade. The firm has identified several Asian countries, such as India, Bangladesh, and Vietnam, as potentially lucrative growth markets. Although the Chinese cigarette market is predominantly a monopoly, Philip Morris has entered into a joint venture with China National Tobacco to cross-sell products. The joint venture, which licenses the Marlboro brand in China and promotes Chinese heritage brands in international markets, is currently not a significant part of Philip Morris' business.
|Economic Moat||Fair value||Stewardship Rating|
Defensieve cons. goederen -
- With almost 29% global market share (excluding the U.S. and China), PMI is the largest publicly traded tobacco company in the world. 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.
- With a focus on premium products, the firm has benefited from consumers' desires to trade up. Its operating margins, above 40%, are higher than those of its peers.
- Excise tax increases, additional regulation, or reduced consumer demand could have a negative impact on Philip Morris' cigarette volume and drive up the prevalence of illicit smokes.
- Philip Morris generates 30% of its revenue from the EU, where volume has been falling about 6% per year. Additional economic uncertainty and austerity measures could further affect European cigarette volume.
- 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.
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