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Summary

  • The British Medical Association passed the vote favoring a permanent ban on cigarette sales to persons born after the year 2000.
  • Philip Morris International has margins of 25% and 16% in Asia and the European Union respectively.
  • Strategies of banning versus price floors are becoming more prominent as tobacco continues to show its inelastic strength.

United Kingdom doctors voted in favor of a permanent ban on cigarette sales to people born after the year 2000. The strategy, if put in place, would be detrimental and the vote sent Phillip Morris International (NYSE:PM) and other global cigarette companies lower. Philip Morris International took the biggest hit, falling 2% after the vote occurred.

Cigarette companies have come under fire in the past few years in a more intense way than ever before. In the United States, the age for tobacco use was raised in New York State from 18 to 21. Further, the price for a single pack was assigned a price floor of $10.50, making it widely unaffordable to the average smoker. The British Medical Association (BMA) passed the vote, which is seen as the first step in banning all cigarettes through a strategy that hopes to prevent children from developing the habit. BMA representative Tim-Buqué pointed to an integral aspect of the approach

It is not expected that this policy will instantly prevent all people from smoking, but (it will) de-normalize cigarette smoking.

The idea being to stop the youngest generation from picking up the habit, and as the trend continues, cigarettes will be phased out within a few generations throughout most of the world. But the possible results from this strategy are decades away. Even though this targets the younger generation, Philip Morris is focusing on adults. The strategy has been paying off with shareholders, and the company continues to expand into new territories.

Strength In Asia

Philip Morris International's strength can be seen with a dominating position with 26.2% of the company' $80 billion in revenue coming from Asia. The European Union does make up close to a third of the company's profits, but the strategies, if implemented, won't effect profits for at least a decade. What should help shareholders sleep better is that margins are much better in Asia, with $5 billion in profits on around $20 billion in revenue. The EU has larger revenues, accounting for 35%, or $28.6 billion, of Philip Morris's total revenue in 2013, but the margins are much lower, due to regulations and taxes that are not always passed onto the consumer. The EU generated $4.6 billion in profits in 2013.

(click to enlarge)Source: Trefis-Philip Morris International Divisions by Adjusted EBITDA

Source: Trefis-PM Adjusted EBITDA by Regions

Comparing the two regions of Asia and the European Union, total margins are 25% and 16% respectively. This is a case study in how price floors, regulations, and taxes hurt the bottom line of these companies. Fortunately for Philip Morris, the product it sells is economically speaking highly inelastic, but also from a subjective standpoint, its products are of high quality, so the demand continues despite the efforts of the opposition. This is one reason why new strategies, like the BMA's, are continuously being proposed. It is not the first, and will not be the last. The Philip Morris brand has around 30% market share in Asian markets, with Marlboro being the most popular cigarette brand. The same can be said in other countries about Marlboro, which proves that Philip Morris is providing a quality product. The company's biggest strengths right now are its ability to have quite high gross profit margins reported as 68.41%, with net profit margins of 27.10%, ranking above industry competitors.

Currently, Philip Morris is trading at $89.90, and roaring 20% since February of this year. Coupling these gains with wide speculation of an overall market correction, one may want to wait before buying into Philip Morris. However, the company's 4% dividend is enticing, especially when interest rates continue to stay low, so shareholders should wait out any possible correction.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Philip Morris Shows Strength, Despite Recent Blows To The Industry