Economy Urbem's "Wonderful Business" series: Philip Morris

Urbem’s “Wonderful Business” series: Philip Morris

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Philip Morris (PM), headquartered in New York City, is a Switzerland-based multinational cigarette and tobacco producer whose products are sold in over 180 countries. The independent company was founded in 2008 as a result of a spin-off from its parent company Altria (NYSE: MO) to gain more “freedom” for expansion outside the United States.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "As of fiscal 2018, Philip Morris had 44 manufacturing sites worldwide, with Europe, the Middle East and Africa contributing the largest share of sales (55%), followed by the APAC region (35%) and America (10%). With a portfolio of leading brands, the company claims to have a market share of more than 15% in around 100 industrialized and developing countries, including Japan, Indonesia, Turkey, South Korea, Mexico, Germany, Italy, Canada, Australia, Brazil and the Philippines , Russia and Spain. The world’s best-selling international cigarette, Malboro, is owned by Philip Morris, who makes up around a third of the company’s total cigarette shipping volume. It is recognized as one of the best known brands among all consumer goods. In addition, the company owned the other office of the 15 leading international brands in the category in various price ranges, including the Premium Parliament and the Mid-Price L&M.“data-reactid =” 12 “>As of fiscal 2018, Philip Morris had 44 manufacturing sites worldwide, with Europe, the Middle East and Africa contributing the largest share of sales (55%), followed by the APAC region (35%) and America (10%). With a portfolio of leading brands, the company claims to have a market share of more than 15% in around 100 industrialized and developing countries, including Japan, Indonesia, Turkey, South Korea, Mexico, Germany, Italy, Canada, Australia, Brazil and the Philippines , Russia and Spain. The world’s best-selling international cigarette, Malboro, is owned by Philip Morris, who makes up around a third of the company’s total cigarette shipping volume. It is recognized as one of the best known brands among all consumer goods. In addition, the company owned the other office of the 15 leading international brands in the category in various price ranges, including the Premium Parliament and the Mid-Price L&M.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "We believe that the strong brand, the economies of scale on a global scale, and the barriers to entry due to regulations together form a broad and profound competitive gap for Philip Morris. As stated below, the company achieved a stable and above-average annual return on investment that also outperformed comparable companies such as Altria, Japan Tobacco (TSE: 2914), Imperial brands (LSE: IMB) and British American Tobacco (LSE: bats) (BTI). Although the overall cigarette market has been declining for a long time, we expect Philip Morris to maintain its leading market share (28% of the international market from 2018, excluding the U.S. and China).“data-reactid =” 19 “>We believe that the strong brand, the economies of scale on a global scale, and the barriers to entry due to regulations together form a broad and profound competitive gap for Philip Morris. As indicated below, the company achieved a stable and above-average annual return on assets that also outperformed comparable companies such as Altria, Japan Tobacco (TSE: 2914), Imperial Brands (LSE: IMB) and British American Tobacco (LSE): BATS ) (BTI). Although the overall cigarette market has been declining for a long time, we expect Philip Morris to maintain its leading market share (28% of the international market from 2018, excluding the U.S. and China).

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Philip Morris’ growth strategy to enable a smoke-free future is clear: The product portfolio with reduced risk (referred to as “UVP”) is to be innovated and expanded worldwide. The management emerged from the annual letter to shareholders in 2018 as follows:“data-reactid =” 37 “>Philip Morris’ growth strategy to enable a smoke-free future is clear: The product portfolio with reduced risk (referred to as “UVP”) is to be innovated and expanded worldwide. The management emerged from the annual letter to shareholders in 2018 as follows:

“Our flammable tobacco portfolio has provided the resources to invest in our vision of a smoke-free future and the ultimate transformation of our business. Until we realize our vision, we continue to strive to maintain a leading position in the international cigarette category, and we manage it Portfolio accordingly. “

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Philip Morris’s long-term competitive advantages are gradually being transferred to the company’s innovative heat-not-burn platforms, mainly IQOS. While there are concerns about the risk to the superior margin profile and possible cannibalization, both the company’s profitability and cash generation have remained robust so far. As of fiscal year 2018, sales of reduced risk products accounted for 14% of total sales and increased nearly 13% year over year compared to close 1.7% growth in the traditional combustible segment.“data-reactid =” 41 “>Philip Morris’s long-term competitive advantages are gradually being transferred to the company’s innovative heat-not-burn platforms, mainly IQOS. While there are concerns about the risk to the superior margin profile and possible cannibalization, both the company’s profitability and cash generation have remained robust so far. As of fiscal year 2018, sales of reduced risk products accounted for 14% of total sales and increased nearly 13% year over year compared to close 1.7% growth in the traditional combustible segment.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "IQOS uses a business model with razors and blades: the company sells the device with a low margin to generate recurring income from the higher margin heated tobacco units (referred to as “HTU”). Japan is the “birthplace” of IQOS and is currently the largest market. At the same time, the device is now available in over 50 markets worldwide and has a customer base of more than 12 million. HTU’s international market share doubled in 2018. In the past, around 70% of IQOS consumers were switched directly from combustible smoking.“data-reactid =” 42 “>IQOS uses a business model with razors and blades: the company sells the device with a low margin to generate recurring income from the higher margin heated tobacco units (referred to as “HTU”). Japan is the “birthplace” of IQOS and is currently the largest market. At the same time, the device is now available in over 50 markets worldwide and has a customer base of more than 12 million. HTU’s international market share doubled in 2018. In the past, around 70% of IQOS consumers were switched directly from combustible smoking.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Given the only 4% share of the retail price in retail value, the overall addressable international market (excluding the United States and China), we see a massive upturn for Philip Morris to continuously implement its growth strategy. In the meantime, we recognize two significant risks for IQOS and its HTUs – competition from vaping products such as Juul and regulatory uncertainties related to the category.“data-reactid =” 43 “>Given the only 4% share of the RRP in retail value, the overall addressable international market (excluding the United States and China), we see a massive upswing for Philip Morris to continuously implement his growth strategy. In the meantime, we recognize two significant risks for IQOS and its HTUs – competition from vaping products such as Juul and regulatory uncertainties related to the category.

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<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "In terms of capital allocation, it seems to us that management has done a good job. The company stopped buying back shares in 2016 (following an exploding valuation as described below) and is now paying around 90% of its profit as a dividend. At the same time, about 20% of profits in a typical year are reinvested in the business as CapEx to drive long-term growth in the EIA category.“data-reactid =” 48 “>In terms of capital allocation, it seems to us that management has done a good job. The company stopped buying back shares in 2016 (following an exploding valuation as described below) and is now paying around 90% of its profit as a dividend. At the same time, about 20% of profits in a typical year are reinvested in the business as CapEx to drive long-term growth in the EIA category.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Disclosure: Mentioning a security in this article is not an investment recommendation. Investors should always do a thorough analysis themselves or consult their investment adviser before going public. We own Philip Morris shares.“data-reactid =” 65 “>Disclosure: Mentioning a security in this article is not an investment recommendation. Investors should always do a thorough analysis themselves or consult their investment adviser before going public. We own Philip Morris shares.

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<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This article first appeared on guru Focus,
“data-reactid =” 73 “> This article was first published on GuruFocus.

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