2 Reasons Why Philip Morris Looks Like a Good Investment

Even though Philip Morris has struggled in recent quarters, its strategies suggest that the company can still deliver.

May 18, 2014 at 9:00AM

Tobacco giant Philip Morris International (NYSE:PM) has hit a rough patch as volumes of traditional cigarettes have been declining. Philip Morris, the parent of popular brands such as Marlboro and L&M, has trimmed its profit forecast for 2014, and international cigarette volumes are expected to fall 3% this year. However, Philip Morris will look toward the growing market for e-cigarettes to mitigate the weakness in its traditional business, where its rival Lorillard (NYSE:LO) is already making some gains.

Let us take a look at the various moves that Philip Morris is making, and see if they could help the company get back on the growth track.

Trying to capture more market share
Philip Morris has very simple goals for the year. The company will focus on effective cost controls, productivity gains, and marketing reduced-risk products, and it will use the strong pricing power of its brands. Philip Morris' brands are well-known across the globe, which is why the company commands almost 30% of the tobacco market outside of the U.S. and China. It is now looking to use its brand equity to gain more market share.

Philip Morris has strategically invested in restructuring its business in Egypt. This is a smart move by the company since Egypt is a 80 billion unit cigarette market. Additionally, Philip Morris purchased a 20% stake in Megapolis, which is the distributor of its products in Russia. This should give the company more control over its business in the large Russian market, and eventually help it increase its share in the region. The company expects that these two initiatives alone will add approximately $0.10 to its earnings per share in 2014. 

In addition, Philip Morris also bought the remaining 20% stake from its business partner in Mexico, and it also took a 49% stake in Arab Investors-TA. Arab Investors-TA manufactures and distributes international cigarette brands in Algeria. These moves should bolster Philip Morris' sales in the Europe, Middle East, and Africa, or EMEA, region along with Latin America, where it had registered double-digit growth rates in 2013.

In addition, Philip Morris is aggressively promoting Marlboro with its "Don't Be a Maybe, Be Marlboro" campaign. This campaign has received a positive response in most markets in the European Union, along with other regions. This was probably the reason why the volume of Marlboro cigarettes declined 4.1% in the quarter, which was below the overall volume decline of 4.4%.

Moving into e-cigarettes
Looking ahead, Philip Morris will make significant investments in risk-free products that reduce the risks of tobacco-related illnesses. The company will test these products in the second half of 2014 and finally launch them in the first quarter of 2015. According to The Wall Street Journal, global sales of e-cigarettes are around $2 billion, which is very small in comparison with the $800 billion tobacco market. However, this market is growing fast and sales of e-cigarettes are expected to exceed those of traditional cigarettes. 

That's why Philip Morris is trying its best to make the most of this opportunity. It has signed an agreement with Altria (NYSE:MO) under which both of these companies will share the technology for electronic cigarettes and reduced-risk products under several licensing and supply agreements. Altria has already made a move into the e-cigarette market with its MarkTen brand. Altria will distribute MarkTen nationally after initially testing it in Indiana and Arizona.

Philip Morris can benefit from this partnership since Altria already has some expertise in this area. Altria will license its e-cigarette products to Philip Morris for distribution outside the United States.

However, Lorillard could pose a challenge for Philip Morris in the international markets. Lorillard acquired SKYCIG, a leading e-cigarette player in the U.K, last year. Lorillard already commands around half of the e-cigarette market in the U.S. as a result of its Blu acquisition, and the company can leverage its expertise in this department in the international market as well. Because Philip Morris also has a presence in the U.K., it will run into Lorillard going forward.

Bottom line
Global cigarette volumes are expected to decline, but Philip Morris is doing the correct thing by trying to increase its market share. As a result, the company has acquired stakes in several distributors around the world. In addition, to boost volumes, the company is looking to tap the e-cigarette market. So investors should have faith in Philip Morris as it can get better in the long run.

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Ayush Singh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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