Philip Morris International (PM), the world’s leading international tobacco company outside of the U.S. and China will release its Q3 earnings on Thursday. While the Asian markets will provide it organic sales growth, European sales are likely to continue declining. Yet, its dominant market share in the premium segment will provide significant room for higher pricing, especially in Europe that will help maintain operating margins despite flat global cigarette shipment volume. PMI’s product portfolio boasts 8 of the world’s top 15 brands including Marlboro, the number one cigarette brand worldwide. Until a spin-off in 2008, Philip Morris International was an operating company of the Altria Group (MO). Philip Morris International competes with British American Tobacco (BTI), Japan Tobacco (OTCPK:ITYBF) and Imperial Tobacco Group plc (OTCQX:ITYBY) in its various geographical segments.
Last quarter, PMI’s growth was largely driven by double digit growths in the Asian markets of Indonesia, Japan and Korea. Globally, PMI managed to maintain its operating margin despite flat cigarette shipment volume through higher pricing and favorable currency exchange rates.
Asian markets will grow while European markets may shrink further
This quarter, we expect the cigarettes market volume to continue to decline in Europe, notably in Greece, Poland and Spain, due to growing health consciousness and high excise (currently ~70% of revenue per cigarette). We expect the decline in PMI’s sales volume to be between 2 to 4%. Yet we expect it to maintain its operating profits through higher pricing, particularly based on its dominant market share in the premium segment.
While the global cigarette sales volume has almost flattened for PMI, Asian and few Latin American markets will continue to be growth markets for PMI in the near term. We expect Indonesia, Philippines, Argentina, Brazil and South Korea offer PMI organic sales growth. Sales in the Philippines will continue to rise after the 2010 merger with Fortune Tobacco Corporation. Post-merger PMI-FTC together control up to 90% of the expanding Philippine tobacco market with a greater presence on the low and mid-priced segments. The steep decline in cigarettes demand in Mexico after the disruptive excise hike in January is also expected to slow down.
(Chart created by using Trefis' app)
Pricing Focuses on Profitability
With a favorable geographical footprint and a strong product portfolio, Philip Morris International expects an average 3-5% growth in its annual revenues, net of excise taxes. Amid declining volume of cigarette sales in several key markets worldwide and rising excise taxation, PMI will continue to focus on its profitability. Accordingly, the profit margins will primarily be driven by higher pricing. PMI also recently concluded the 2008-10 cost savings program and expects to save $1.5 billion in costs annually going forward. This will significantly help its bottom line.
We have a $72.62 price estimate for Philip Morris International, 10% ahead of the market price.
Disclosure: No position