The company’s subsidiaries and affiliates, and their licensees are engaged in the manufacture and sale of cigarettes, and other tobacco products in markets outside of the United States of America. Its products are sold in approximately 180 countries.
Financial And Growth
Excluding the U.S. and China, the company has a strong global market share of approximately 29%, and has delivered a healthy financial performance in the past. As per company’s 2012 report, PM held an estimated 16.3% share of the total international cigarette market outside of the U.S. with more than $77 billion in revenues. Also, the company has well diversified geographical sales and profits. A well diversified revenue base helps PM to benefit from superior growth rates as compared to its peers in the business.
During the last quarter, 1Q 2013, PM’s organic volume has a decline of 7%. This decline was higher than what was expected by the analysts. However, the company was ultimately able to grow its organic sales (top line) by 3% due to very strong, 10%, increase in prices.
Apart from the price increase, Philip Morris used a share buyback program as another tool to expand its bottom line. In July 2012, PM completed its three year buyback program which worth $12 billion. Another share buyback program of $18 billion was announced in August 2012, and under this ongoing buyback program PM repurchased 16.7 million shares by spending $1.5 billion in 1Q 2013. Since its inception in 2008, it has bought back more than 400 million shares which are about 20% of its initial stock.
The company has a lower PEG of 1.4, impressive ROA of 24%, a decent dividend yield of 3.7%, and robust growth projections. Its dividend payout ratio was 62% in 2012, which is reasonable given the company's stable business in the long-term. It generated about $8.4 billion in free cash flow during the past year, more than covering its dividend payments.
One of the major threats that Philip Morris faces is currency risk. PM is an American company but, it earns 100% of its revenues from outside the U.S. which exposes heavily the company to the greenback movements. If the US dollar falls, it would enjoy a boost in international sales, but the opposite happens if it arises.
Other risks include the rising health concerns, and increased regulations. For this reason, the U.S. tobacco industry has been going through difficult times as volumes for traditional cigarettes are falling.
Price increase and share buyback undertaking will help to grow the company's top and bottom lines in the near the future but, PM should explore and work aggressively towards alternates to traditional cigarettes. Electronic cigarette (e-cigarette) is one of the alternates to traditional cigarettes, which provides significant market and growth opportunities to the tobacco industry. As per Euromonitor estimates, the global e-cigarette market was worth more than $2 billion in 2012. Some analysts also believe e-cigarettes can take over traditional cigarette markets in 10 years.
But, Philip Morris is the most high-profile e-cigarette refusenik, and is instead focusing on developing a cigarette that heats rather than burns tobacco, producing less tar and smoke.
To Wrap Things Up
Philip Morris has a lower PEG which indicates that PM offers cheap growth than others. Moreover, Philip Morris is the best positioned among its peers to benefit from consumers trading up to premium brands as disposable income rises, and an opportunity to bring the proportion of premium volume up to levels similar to what it has in developed markets can be seen.
The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and expanding profit margins. Philip Morris uses derivatives as hedging instruments to offset the currency risk, so its dividend should not be seriously threatened due to currency losses.
Considering the company's pricing power and exposure to growing emerging markets, Philip Morris has a bright prospect. Therefore, for investors in search of opportunities with current and future growth potential, Philip Morris International provides a great investment.