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Is Philip Morris a Good Investment?

April 10, 2014 | About:
rusticnomad

Rustic Nomad

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Philip Morris International (PM) is not having a great time this year as shares are down more than 6%. Philip Morris is facing various challenges such as currency fluctuations in 2014, yet management is looking to tide over the various problems that come its way by making significant investments to grow the business. These investments would be mainly in products with less risk, along with its current portfolio, which will help Philip Morris overcome the different challenges that it faces around the world.

Also, Philip Morris' move into e-cigarettes should help the company do well in the future, just like industry peers Reynolds American (RAI) and Lorillard (LO). Let’s check out the company’s moves.

Concerning Factors

Japan would be a concern for the company in 2014. The Japanese government is increasing consumption tax in April from 5% to 8% and this could hurt Philip Morris’ sales. Consequently, the company has applied to the Minister of Finance to seek approval to increase the prices of its products. But, this increase would negatively impact Philip Morris’ position, leading to a market share decline of 3% to 3.5% from 2% last year.

Philip Morris is facing difficulty growing its business, a fact that’s very much evident if we take a look at its overall market share in the fourth quarter that declined to 25.9%. In comparison, its market share in 2013 declined from 27.7% to 26.7%.

Strategic Initiatives to Drive Growth

But, management is taking decisive actions to boost sales, such as new products in the menthol segment. In addition, Philip Morris has launched a new campaign for its Marlboro brand with the tagline “Don’t Be a Maybe, Be Marlboro,” which has proven successful in a number of markets in Europe and other regions. Philip Morris also plans to introduce new products under the Marlboro and Lark trademarks. With these new launches, coupled with increased spending to support them, Philip Morris expects its market share to stabilize.

Apart from Japan, the Philippines is also a challenging market for Philip Morris in Asia, where it faces tough competition from Mighty Corporation, which produces double the volume of what it declares to the Bureau of Internal Revenue, dodging taxes in the process. But, to address this issue, the government is implementing a system of fiscal stamps by the second quarter, and this could be a relief for Philip Morris. In addition, Philip Morris is also making investments to defend its business, and once these short-term pains are over, the Philippines is expected to be a major contributor to its growth in the future.

However, Philip Morris has a negative outlook for 2014 due to a weak economy and significant increase in prices in the low-price category products, led by government regulations. But, it expects to benefit from the growth of lighter-tasting machine-made kretek brands, Sampoerna A and U Mild. It is also gaining share in the full-flavor machine-made kretek brand.

Philip Morris has announced the construction of a new manufacturing facility near Bologna, Italy. Coupled with a pilot plant, this facility will produce 30 billion units annually. It is also planning to enter the electronic cigarette market in the second half of the year.

The e-Cigarette Move

The move into e-cigarettes should reap rich dividends for Philip Morris in its international markets. Peers Reynolds and Lorillard have already gained some momentum in this department in that the U.S. Lorillard’s Blu brand has helped it capture 50% of the e-cigarette market in the U.S. But going forward, Lorillard has designs on entering the UK market as well and acquired SKYCIG, a leading electronic cigarette brand in the country, last year. Since Philip Morris also has interests in the UK market, it can expect competition from Lorillard on the international front in the future.

Reynolds, meanwhile, is pushing sales of its vapor-technology based e-cigarettes known as Vuse Solo and Vuse System. Reynolds had launched this cigarette in Colorado in June last year, and has lined up significant geographical expansion this year. However, it looks like a global launch is still not in the cards for Reynolds, so Philip Morris has lesser reasons to worry about it.

A Solid Dividend

Philip Morris is known for its hefty dividend yield of 4.60% and share repurchase programs. It had increased its dividends by 10.6% last September, while its dividend payout ratio remains at 68%. Also, it had repurchased 67.2 million shares last year, amounting to $6 billion. This year, the company plans to spend $4 billion on share repurchases, apart from paying the dividend, as it looks to invest in growth. But investors shouldn’t be disappointed as the developments highlighted above could lead to market share stability, and lead to better repurchases and dividends in the future.

Bottom Line

Although there are challenges in Japan, Philip Morris is positive about Philippines and Europe. The company has a trailing P/E of 15.22, while a forward P/E of 14.35 indicates earnings growth in the future. Coupled with its dividend paying nature and projected earnings growth of almost 7% for the next five years, Philip Morris looks like a sound investment. And once its strategies start bearing fruit, Philip Morris could perform even better.


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