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Analysis of Philip Morris: Another tobacco giant on thin ice?

Charles Sainsbury
2. 4. 2023
5 min read

Philip Morris is one of the largest manufacturers and distributors of tobacco products in the world. The company manufactures and sells cigarettes, smokeless tobacco products and new tobacco and nicotine products. It's a great business. But is it also a great stock?

A basic overview

Philip Morris International is one of the world's largest manufacturers of tobacco products and its major brands include Marlboro, L&M and Parliament. Founded in 1847 in the US, the company split from parent company Altria in 2008 to focus exclusively on international markets.

PM is looking to diversify its portfolio into new segments, including products such as e-cigarettes and low-nicotine products. The company is also investing in research and development in this area. As strange as it sounds, PM also strives to be a socially responsible company and supports programs such as anti-smoking and health research. The company also invests in sustainability and reducing greenhouse gas emissions.

However, the company still faces criticism for its business practices that can contribute to the deterioration of human health and environmental damage. PM also faces regulations in many countries that restrict the sale and advertising of tobacco products.

Sector

The tobacco industry has historically been a strong sector with high levels of customer loyalty and stable cash flow. However, in recent years, the industry has faced regulatory and legislative pressures that have restricted advertising, increased taxes and introduced various methods to discourage customers from smoking and using tobacco products.

Philip Morris $PM+0.3% 's main competitors in the global market include companies such as British American Tobacco $BTI-0.4%, Japan Tobacco International and Imperial Brands. All of these companies are seeking to diversify their portfolios and adapt to changing consumer preferences and regulations.

Philip Morris International has stable revenues of around USD 70 to 80 billion per year. Despite declining sales of conventional cigarettes, the company is successfully expanding into the smokeless tobacco segment and alternative nicotine products such as IQOS.

The company's revenue is around $80-90 billion per year. Source

The company has stable profitability with EBITDA margins of around 40% and net margins of around 25%. These figures indicate that the company is able to manage its costs effectively and maintain a high level of profitability. Philip Morris is known to distribute attractive dividends on a regular basis, which makes it attractive to investors looking for regular income. The dividend yield is typically around 4-6%, which is an above-average yield compared to the overall market.

PM's dividend has risen regularly. Source

Current situation

Over the last hundred years, tobacco companies have made billions and billions of dollars selling a product that is harmful, expensive and smells bad. Now try to think how much money they could make if the same product didn't have all these negative characteristics. Well, that is becoming a reality, and faster than expected.

The more time that passes, the more socially unacceptable combustible tobacco becomes, so it is not a market that is exploitable in the very long term. Something new is needed!

IQOS

When the products you make are the number one cause of preventable death in the world, you probably need to change something, and Philip Morris has done that. With the launch of IQOS, the tables have been completely turned as this product solves a large part of the problems associated with smoking. Not all of it, of course, and it's still definitely not healthy. It's just a bit better than conventional smoking.

The tobacco vapour produced by IQOS is made up of 90% water and glycerin and contains an average of 95% lower concentrations of harmful chemicals than a cigarette. Of course, this does not mean that it is not harmful to health.

Customers see this, and so customers buy and switch. In terms of profitability, the figures confirm the correctness of Philip Morris's plan. Revenues from smokeless products are growing rapidly and are managing to offset the decline in the combustible tobacco segment. Moreover, as their share of total sales increases, free cash flow margins are improving. In 2018, smokeless products accounted for 12% of total sales , and 32% in 2022. And the good thing is that the competition is not keeping up with this pace at all. The lead on Altria and British American Tobacco is quite large, especially when it comes to the share of sales from smoke-free products in total sales: for the former it is 10.3%, while for the latter it is 17.8%.

Morris seems to have a slightly better future-proof segment than its competitors. Moreover, as it happens, the company's financial and dividend position in this segment is very good and stable. The valuation is higher because investors are aware of these qualities. Personally, I avoid tobacco companies, but PM strikes me as one of the better choices.

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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