By: Robert Harrington
Philip Morris International (PM) is one of the largest tobacco companies in the world. With dozens of globally recognized brands and deep pockets, the company continues to grow its footprint in nearly every continent it operates in. Although recent weakness in several key markets will probably persist over the near term, Philip Morris’ geographic flexibility and ongoing growth initiatives should support it well into the future. The softness, particularly in Japan and the United Kingdom, underscores what is amounting to an exceptionally tough year for the tobacco giant, a year management has called “complex and atypical.” So, should investors be concerned about these struggles of late? Does recent stock activity favor long-term investing? Which types of investors are best suited for the company’s stock? In this article, we will address these questions by taking a brief look at Philip Morris’ business and performing an easy-to-follow SWOT analysis of the company, evaluating its strengths, weaknesses, opportunities, and threats.
Business
Until several years ago, Philip Morris International operated as the foreign-tilted subsidiary of big tobacco heavyweight Altria (MO). The 2008 spinoff was made to free Philip Morris from domestic regulations and other assorted red tape associated with an American company doing business overseas. Now, the two companies continue to work somewhat in tandem, as their ongoing relationship has seen Philip Morris attain exclusive foreign distribution agreements to market Altria’s suite of traditional and alternative tobacco products. The company’s reach, through its various brands and businesses, extends into 200 countries. Philip Morris, with $80 billion in revenues last year, possesses about 15% of the international tobacco market. Though headquartered in New York City, it operates exclusively outside of the U.S.
Strengths
Brand
Philip Morris develops and markets dozens of popular regional, national, and international brands, ranging from Marlboro to Parliament. It also distributes several multi-billion dollar tobacco brands, including Indonesia’s Kretek and the French company ST Dupont Paris. Despite various measures to limit Big Tobacco’s advertising and marketing capabilities in several regions, Philip Morris continues to translate its brand equity into an annually increasing top line. In an attempt to stay ahead of demand, the company once again aligned itself with Altria in marketing the MarkTen electronic cigarette. While a relatively late entrant into the American e-cigarette race, the MarkTen should be able to snatch up international market space by way of Philip Morris’ international distribution network and Altria’s wide retail footprint.
Cash Generation
The global demand for Philip Morris’ high-margined products lends itself to constant, healthy cash growth. Excess cash is used to fund innovation, like low-risk and electronic products, as well as acquisitions in target markets. The company also devotes a substantial amount of this cash to reward its shareholders through quarterly dividends and repurchases of common stock. Given the unending scrutiny facing nearly all aspects of Philip Morris’ operations, from the cash register to the courtroom, this cash flow goes a long way in funding its various legal procedures as well. The company is currently dealing with nearly 100 filings against its operations in some capacity, so the bountiful cash flow insulates it from excess risks related to these matters, and allows it to continue rewarding investors for their holdings.
Weaknesses
Local Headwinds
One major drawback of Philip Morris’ global reach is the exposure it brings to the trials and tribulations of local economies. These currency headwinds can drastically impact business in key regions and compel the company to pivot geographically. For instance, recent economic troubles in Western Europe forced the company to rely more heavily on its Asian and African businesses. Sudden waves of political strife can also have major implications on shipments and overall business in any number of regions. As Philip Morris continues its expansion into emerging nations, many potential risks need to be considered. Pockets of growth in Eastern Europe and the Middle East often overlap with conflict-torn areas, a reminder that with the geographic flexibility comes some inherent risk built into the company’s business model.
Regulatory
The nature of Philip Morris’ business lends itself to an exceptional level of scrutiny, taxation, and regulation. Among the many measures taken by foreign governments to reduce national smoking rates, plain-packaging mandates represent the most recent potent challenge to Philip Morris’ operations. The idea was born in Australia and requires all cigarette packs boast the same, nondescript white and black wrapping. This limits companies like Philip Morris’ ability to leverage its too-important branding into higher sales. Australia’s case might be a harbinger for future struggles, as the company is currently rushing to build up its alternative product offerings, such as cigar sales, in the country. It appears years of hiked taxes, environmental scrutiny, pressure from health agencies, and other assorted regulatory moves have largely impacted Big Tobacco’s presence in the country. The measure is inspiring similar regulation in other nations. In August, Philip Morris threatened legal action if the United Kingdom pursued its own plain-packaging regulation.
Opportunities
Geographic
Philip Morris is adept at identifying growth regions with under-addressed demand for tobacco products. Its 2005 acquisition of four Indonesian tobacco companies eventually helped the company attain a market-leading position in the nation. As certain nations apply new regulations and increase taxation on tobacco products, this global flexibility allows Philip Morris to maximize potential business in other areas. Over the past few years, Eastern Europe, Africa, and the Middle East have been identified as emerging smoking markets. The combined contribution to companywide revenues of the three aforementioned regions has grown from 23.7% in 2011 to 27.4% in 2013. Accordingly, the company has invested in new ventures in the United Arab Emirates and Jordan over the past year.
Electronic
Amidst the pressure to limit consumption of traditional tobacco products, one of the rare pockets of growth for the industry exists in vaporized nicotine e-cigarettes. The segment’s growth has accelerated over the past few years in tandem with various public smoking bans and other factors. Philip Morris, for its part, was recently awarded with exclusive distribution and marketing rights to sell Altria’s suite of alternative products, namely the recently released MarkTen e-cigarette and the chewable Vuse. This segment, while currently slight compared to the rest of its operations, will likely be relied on down the road to offset any losses the company might experience in some struggling nations.
Threats
Competition
In addition to the constant arms race versus its fellow Big Tobacco conglomerates, like British American Tobacco (BTI), Philip Morris faces stiff competition from smaller companies. That is, given the company’s sprawling global focus, some regionally focused companies might have the upper hand in addressing their native smoking markets. The Chinese market, for example, is largely controlled by its state agency, China Tobacco. The agency boasts a near monopoly on some 30% of the global smoking market, limiting Philip Morris of any opportunity to penetrate its borders regardless of its hearty cash position.
Smoking Rates
One of the takeaways from Philip Morris’ SWOT Analysis is that operating in the tobacco industry requires expert brand marketing and exceptional cash generation. The constant and unceasing pressure from governments and health agencies to gradually eliminate smoking from society has intensified in recent years. To attract more customers, Philip Morris will likely invest heavily in e-cigarette technology, as well as its various lobbying and legal efforts to maintain a beneficial operating environment. It also bears noting that while smoking may be down in several parts of the world, the number of total smokers continues to grow.
Conclusion
Philip Morris International remains a financially sturdy company in a globally lucrative industry. Though competition is intense and comes in all sizes, the company should be able to maximize its growth opportunities on the heels of brand equity and product innovation. Any long-term appeal at the stock’s recent trading level is largely dependent on the company’s ability to market its next-generation electronic products across the globe. Still, above all else, shareholders are constantly rewarded for investing here, as evidenced by the high-yielding quarterly dividend and management’s constant focus on profit growth. Despite the many risks presented to Philip Morris on nearly all operating fronts, management views next year as a bounce-back opportunity for the international tobacco giant.
