Philip Morris – A Stock To Deal Cautiously

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Feb 27, 2015
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Tobacco giant Philip Morris International (PM, Financial) is passing through rough weather right now. The company had to face lots of challenges from competitors and foreign markets in the past, which has resulted in less returns and reduced share prices. While it cannot be denied that there is an air of negativity around the company right now, investors can still consider investing after waiting to see if it performs well in the following key areas. The company’s performance in these areas will determine if it is equipped to sustain in the market for a longer period of time.

Growth in the Philippines market

Of all the South Asian economies, Indonesia and Philippines account for the highest number of cigarette smokers. As per a recent study, close to 50% of the population in these economies smoke, whereas smokers in the US is just about 20%. Ideally, an economy with such a huge number of tobacco consuming people should present Philip Morris with a great opportunity to penetrate into and gain a considerable market share. However, the company has not been able to make inroads into this economy, because it is being challenged by the local cigarette manufacturer, Mighty Corporation. Mighty has been playing smart all these years by declaring fewer number of cigarettes sold, thereby getting huge tax exemptions. For 2013 alone, it declared sales of close to 50% less cigarettes than it actually sold.

Things have changed recently, though. Philip Morris has challenged the way taxes have been applied in the country and now tax rules are currently under scrutiny so that all players get the same platform to compete upon. This change is expected to progress slowly and by 2017, these changes will be applied fully. With the tax reforms getting implemented, Philip Morris has already tasted some progress as its market share has improved a little.Â

Awareness about reduced risk cigarettes

Philip Morris has invested close to $2 billion in the last ten years to develop innovative devices like HeatSticks and iQOS so that their cigarettes can be burnt at a lower level of heat, at around 400 degrees Fahrenheit. The other models of cigarettes are burnt at around 1600 degrees of Fahrenheit and hence they give out a large amount of toxic substances. Cigarettes that use lesser amount of heat were introduced during last year and the management of Philip Morris believes that close to 30 billion units worth $700 million would be sold during this year. The sales revenue earned from this would, to a certain extent, combat the losses suffered due to the reduced demand of traditional cigarettes.

Awareness about these iQOS devices and cigarettes with reduced risks is spreading at a rapid rate among consumers; this should spell good news for the company. As a first step, these new cigarettes were launched in countries like Japan (Nagoya) and Italy (Milan). Consumer responses from both these countries have been very positive and have outperformed the expectations of the company’s management and Wall Street experts as well. Philip Morris will now introduce these cigarettes in a wider market and one can only wait and watch as to how much this move contributes to the total margins of the company. The movement of share prices of Philip Morris for the last few months is seen below

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Conclusion

Investors of Philip Morris should continue to wait and watch as to how the company performs on the above factors. The resurrection initiatives are expected to bear fruit only this year and towards the end of 2015, it will be known if Philip Morris has come back to form or not. As of now, investors have to just cross their fingers and wait with bated breaths to see if their stock survives the competition or not.