Philip Morris, With profit in a smokeless future
Philip Morris International Inc. (PM) is one of the world’s largest manufacturers and sellers of tobacco products. The corporation’s business by a very high level of revenue diversification from a geographical point of view.
EU countries account for 37% of the company’s sales, East Asia and Australia – 19%, South and Southeast Asia – 15%. Traditional tobacco products account for about 75% of PM’s revenue. Still, the company is actively developing tobacco heating systems, bringing about a quarter of all revenue.
One of the critical factors of PM’s investment attractiveness is the transformation of the business model following the “future without smoking” strategy. In the coming years, the main growth driver will remain the direction of electronic cigarettes and tobacco heating systems.
Over the last quarter, this segment’s sales increased by 24% YoY, to 23.5 billion units, primarily due to the largest sales markets of the EU (+36%) and Eastern Europe (+25%). The flagship product for PM IQOS by more than 20.4 million smokers, most of whom have given up regular smoking cigarettes.
Tobacco heating systems. Its share increased by 1.2% during the quarter, reaching almost 8% of the total addressable market. At the same time, the potential for further expansion of the presence remains. For comparison: at the beginning of 2018, Philip Morris tobacco heating systems accounted for about 13% of total revenue, and over the past three years, the average growth rate of the segment was 22%, which is a high indicator for the mature tobacco industry.
She estimated The volume of the global tobacco heating systems market in 2018 at $4.04 billion. Until 2025, the average annual growth rate at 52.5%. For example, if in 2014 100 thousand devices and 15.3 million heating tobacco sticks were sold worldwide, then in 2019, the volume of these sales increased to 12.8 million and 69.5 billion, respectively.
We believe that Philip Morris will be one of the primary beneficiaries of the trend shift towards alternative smokeless smoking methods. According to the current year’s results, the company’s management predicts revenue growth of 9%.
We expect that in 2022 the positive dynamics will continue, and revenue will add about 5.5%. In addition, gains from the sale of tobacco heating systems should increase by 29% and 20% in the current and next year.
Will compensate for the neutral-stagnating dynamics of sales of traditional tobacco products. PM management noted the negative impact of the global shortage of chips on the supply of IQOS. Nevertheless, the CEO believes that the deficit is temporary. Accordingly, Philip Morris raised its quarterly dividend from $1.20 to $1.25 per share.
Assess the risk of the recent controversial deal with Vectura as limited. Our target price for Philip Morris securities on the horizon of 12 months is $120. The growth potential from the current levels is more than 23%.
