BNP Paribas recently announced it would begin reporting on Philip Morris International (NYSE:PM). The firm set a $90 stock price target to be achieved by Philip Morris despite its neutral rating. The stock is currently trading at $83.33. On average, analysts have estimated the company's stock price would reach $93.95 with a hold rating. So, combining the stock's current price and target price it seems likely that the stock will have upside potential and can be thought of as an investment opportunity. The company's on-going marketing activities to introduce products that are less harmful to a person's health may also trigger some ethical investors to think about investing in the company. I am writing this article to explore what is going on in the company that is making analysts set high price targets for its stock. I will also consider industry trends and the extent to which the company is following them as the company's growth will be very dependent on them.
The company is involved in producing and selling tobacco products, including cigarettes, in around 180 markets outside the U.S. The company's world-famous brand, Marlboro, resulted in around 33% of the company's total shipments in 2012. While on aggregate, international brands constituted 70% of the company's total shipment volume in 2012. The company also deals in local brands for its various markets.
To build a case for my analysis, I am starting with a brief discussion on the altering global tobacco and cigarette industry trends.
Changing Global Tobacco and Cigarette Industry
Decline in Traditional Cigarettes and Rising Demand for E-cigarettes
Philip Morris predicts the coverall industry volume to drop by around 2-3% in 2014 based on decreased shipments of conventional cigarettes. Shipments in 2013 declined due to anti-tobacco initiatives as per health concerns and the rising popularity of e-cigarettes.
The company claims that its six most important markets have recorded 25% growth in e-cigarettes over the past two years. A look at the e-cigarette market in the U.S. will reveal how much growth potential the global market holds for a company dealing in e-cigarettes. The market for e-cigarettes in the U.S. is presently lead by Lorillard (LO)'s Blu brand. The growth in the company's revenue can be seen as an indicator of growth in the demand for e-cigarettes. Since the acquisition of Blu in 2012 by Lorillard, the company has rapidly expanded the brand's distribution channel from 12,000 to 127,000 retail stores. As a result the company currently holds a 49% share in the U.S. e-cigarette market. By registering $500 million in sales in 2012, the sales for e-cigarettes rose to $1.5 billion in 2013 in the U.S. The global e-cigarettes market is double the size of the U.S. market so it holds a much larger growth potential for Philip Morris as it will be selling this growing product around the globe. Overall, the global e-cigarette market is forecasted to reach $10 billion by 2017.
The consumption of e-cigarettes is predicted to grow by 40-50% in the coming year. According to Bloomberg Industries sales of e-cigarettes will exceed the sales for conventional cigarettes by 2047. This is because this new technology is considered to have a less harmful effect on health. Innovation in this direction by a company will result in its growth and sustainability as well as for the industry on a whole. The following heading will discuss how the company is working to modify itself in accordance with these changing industry trends.
Favorable Strategic Moves
Investment According to Industry Trends
The company sees 2014 as an investment year. The company has announced it would devote around $680 million to building two manufacturing plants in Italy. These plants are aimed to produce reduced-risk tobacco products. The construction of the pilot plant that will be used to manufacture products for test markets and initial launches is almost complete. The test result of "Platform 1" of the product by the company surpassed its expectations as disclosed in Morgan Stanley's Consumer Conference. The larger plant's construction will completed by 2016. Combined, both of these plants will output 30 billion reduced-risk units per annum. This output is equal to 6% of the European Union's cigarette sales.
The reduction in harm resulting from the use of tobacco products will be achieved through using these cigarettes, as the new technology will heat tobacco instead of burning it. An electronic heater that consumes the carbon heat source will be used to heat the tobacco. These products are regarded as next-generation products and the company has plans to test these in the second half of 2014, with a full-launch expected in 2015. They are supposedly even better than e-cigarettes. This is because they use heating as an alternative to burning like in e-cigarettes, but in addition to this they do not require batteries and use tobacco in place of liquid.
Through this investment, the company will take an important step for its sustainability. This is because it will now account for public health concerns regarding the unhealthiness of tobacco products. The company regards this as capturing a growth opportunity by moving along with the industry trends. This shift will become a growth driver for the company in the coming years.
Cross-Licensing Agreement with Altria
Philip Morris' cross-licensing agreement with Altria (NYSE:MO) would provide it with a high-class license to commercialize Altria's e-cigarettes worldwide. Through this agreement, Philip Morris will receive a developed e-cigarette product to sell in international markets, rather than using its resources to develop the product itself and then selling it. Moreover, the company will have more resources to devote to its innovative reduced-risk products. The move will counterbalance the falling consumption of conventional cigarettes as consumers are shifting to electronic alternatives. Through this strategy the company will enter the e-cigarettes market during the current year.
Growth by Acquisition
Growth by acquisitions and mergers will remain the trend of the industry and a source of growth for the companies within the tobacco industry. Philip Morris has also been progressing in this direction. The company has obtained a 20% stake in the Mexican tobacco business Grupo Carso for $703 million in the most recently reported quarter for FY 2014. Additionally, it has also acquired a 49% share in the United Arab Emirates Company Arab Investors-TA. These two deals will bring synergies for the company beginning Q4 of fiscal year 2014.
The company's activities and strategic moves to keep up with the changing industry trends have caused me to regard the company as a good investment opportunity. The company is likely to achieve its stock price targets as forecasted by analysts. This will be on the behalf of the company's announcement to invest in next-generation products and e-cigarettes, the markets of which are forecasted to grow in the coming years. Recent acquisitions made by the company during the previous quarter of the current fiscal year are also likely to bring growth for the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article