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Philip Morris International

Philip Morris International. December 2, 2010. Katsy Douangvichit Nate Evett Rajani Meka Tom Wang http://stockwatch.in/files/Philip-Morris.jpg. Company Overview Industry Overview Recent Financial Results Competitors SWOT Analysis Porter’s Five Forces Management Assessment

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Philip Morris International

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  1. Philip Morris International December 2, 2010 Katsy Douangvichit Nate Evett Rajani Meka Tom Wang http://stockwatch.in/files/Philip-Morris.jpg

  2. Company Overview • Industry Overview • Recent Financial Results • Competitors • SWOT Analysis • Porter’s Five Forces • Management Assessment • Financial Valuation • Recommendation Agenda

  3. Headquartered in New York, leading international tobacco company that sells products in over 160 countries • Spinoff from Altria on March 31st, 2008 • Operations Center located in Lausanne, Switzerland • 60 factories worldwide • Products include cigarettes, loose tobacco, chewing tobacco, and cigars and cigarillos. • The top player in global tobacco market with 15.4% of the market share outside of the U.S. as of 2009 • 2009 recorded sales: $25 billion • Employs over 77,000 individuals • NYSE ticker symbol: PM • Currently trading at $57.70. Company overview http://www.pmi.com/eng/about_us/company_overview/pages/company_overview.aspx

  4. Brands • PM has the industry’s strongest and most diverse portfolio consisting of blends and styles across 150 districts and more than 1,900 variants • 7 of the world’s top fifteen brands belong to PM • World’s # 1 cigarette brand since 1972 and one of the most powerful trademarks amongst all consumer products • In ’09, its volume outside U.S exceeded 302 billion, which is larger than the sum of top four global brands • L & M is the world’s fourth largest brand http://www.tobaccoworld.org/arcaras-state-tobacco-taxing-policies/

  5. Recent Stock Performance http://finance.yahoo.com/echarts?s=PM+Interactive#chart2:symbol=pm;range=ytd;compare=^dji+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

  6. Philip Morris International falls under the consumer staples sector and tobacco industry which helps in diversifying our current portfolio • PM is the leader of global tobacco industry • Recently listed on NYSE WHY PM?

  7. Global Tobacco market is highly concentrated at the top end with top three players accounting for 44.4% share of total value •  Philip Morris International, British American Tobacco, Japan Tobacco • The tobacco industry consists of retail sale of cigarettes, loose tobacco, chewing tobacco, cigars and cigarillos. Industry overview http://library.marketlineinfo.com.proxy2.library.uiuc.edu/library/DisplayContent.aspx?Ntt=global+tobacco+industry&Ntx=mode%2bmatchall&N=210&Nty=1&D=global+tobacco+industry&Ntk=All

  8. Global market segmentation http://library.marketlineinfo.com.proxy2.library.uiuc.edu/library/DisplayContent.aspx?Ntt=global+tobacco+industry&Ntx=mode%2bmatchall&N=210&Nty=1&D=global+tobacco+industry&Ntk=All

  9. Industry performance The global tobacco industry generated $429.3 billion in ‘09 The global tobacco industry grew at a steady rate between 2005 and 2009 with a CAGR of 3.1% and is expected to follow a similar trend in the forthcoming 5 years Source: http://library.marketlineinfo.com.proxy2.library.uiuc.edu/library/DisplayContent.aspx?Ntt=global+tobacco+industry&Ntx=mode%2bmatchall&N=210&Nty=1&D=global+tobacco+industry&Ntk=All

  10. Government Regulation • Excise Taxes • Legislative compliance requirements • Advertising bans • Social and Economic trends • Health consciousness • Percentage of smokers • Anti-smoking campaigns • World price of tobacco • The major economic factor that hampers growth is taxes • Available resources • Tobacco can be grown on anywhere because of its non-specific growing conditions • Technology • Technology plays a major role in innovation to create less riskier products • Inventory systems • Shipping Options Factors impacting the industry

  11. Government regulation: Impact of Taxes Source: http://www.who.int/tobacco/statistics/tobacco_atlas/en/

  12. Social and economic trends • Percentage of smokers is declining in USA and so is the demand for wholesalers • Adverse public attitudes towards smoking due to more awareness Source: http://www.ibisworld.com.proxy2.library.uiuc.edu/industryus/default.aspx?indid=293

  13. Availability of resources Source: http://www.who.int/tobacco/statistics/tobacco_atlas/en/

  14. Global cigarette consumption The total number of smokers worldwide should increase due to the increase in the world’s population by 2030, however due to better awareness and strict regulations the number is expected to stay steady Source: http://www.tobaccoatlas.org/consumption.html?iss=07&country=0

  15. Market Share http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO6Z2EUD?opendocument&SKN=1 Competitors

  16. British American Tobacco • Known for their commitment to purchase tobacco leaves from environmentally responsible and sustainable sources • Employs over 60,000 people worldwide with over 50 factories • Has over 100 years of experience in the global tobacco industry • Over more than 250 brands in portfolio of tobacco products • Kent • Largest premium brand sold in more than 70 countries • Key markets are Russia, Japan, Eastern Europe, and Chile • Lucky Strike • Launched in 1871, and is one of the longest established trademarks in the tobacco industry • Sold in more than 60 countries. Key markets are Argentina, France, Germany, Japan, Spain, Chile, and Italy http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO88NJ8A?opendocument&SKN=1 http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52ADCY?opendocument&SKN=1 Competitors

  17. Japan Tobacco • Employs over 25,000 people in 89 offices and 29 factories around the world • JT brands are sold in over 120 different countries • Winston • Launched in 1954 and was one of the world’s first filter tipped cigarettes • No 2. top-selling brand in the world and it is distributed in over 80 countries • Camel • Launched in 1913 • Sold in over 100 countries and is the 5th biggest global tobacco brand http://www.jti.com/brands/overview http://www.jti.com/About/facts http://www.jti.com/About/about_history Competitors

  18. Imperial Tobacco • Business strategy also revolves around making acquisitions • Employs over 38,000 individuals with 51 factories worldwide • Over 100 years in tobacco industry • Tobacco products available in over 160 countries • Brands • Davidoff • Sold in over 100 markets worldwide. • Key markets are Taiwan, Greece, and the Middle East. • Gauloises Blondes • Largest volume cigarette brand and is available in more than 70 markets http://www.imperial-tobacco.com/index.asp?page=16 Competitors

  19. SWOT Analysis • Strengths • Strong financial budget • Well-known brands in cigarette market • Prestigious image of Marlboro • Strong distribution Channels • Successful partners in foreign markets • Weaknesses • Tobacco produces considerable health risks to users • Insufficient and inadequate communication with public

  20. Opportunities • Growing new markets in developing countries • Chance to use brands in different sectors • Creating next-generation products with less harm than traditional tobacco products • Merging or forming strategic alliances with local corporations in foreign markets • Threats • Deaths caused by cigarette • Social campaign against cigarette • Legal barriers against cigarette consumption and advertisement • Aggressive marketing campaign of competitors • Increasing prices in tobacco crops SWOT Analysis

  21. Bargaining Power Suppliers – Low • PMI does not grow tobacco and it must find tobacco suppliers • PMI is so big that suppliers would lose a lot of business if PMI ended their relationship • Threat of Substitutes – Low • Increasing awareness of health issues related to smoking • Smokeless Tobacco • Barriers to Entry – High • High level of government regulations • Many lawsuits involved with use of tobacco Porter’s five forces

  22. Bargaining Power of Buyers – Low • No other substitutes for a consumer that is dependent on addictive product • Industry Rivalry – High • Marlboro brand ‘s volume outside the U.S. was 302 billion cigarettes, larger than its next three competitors combined • 15.4% market share globally • Strong competition in Asia http://www.pmi.com/eng/our_products/pages/our_brands.aspx Porter’s five forces

  23. Recent Financial results http://investors.pmi.com/phoenix.zhtml?c=146476&p=irol-sec&control_symbol=2009 10-K Report

  24. Dividend history Listed in March 2008 at NYSE

  25. Very strong philosophy of returning value to shareholders • In Sept. 2009, increased quarterly dividend by 7.4% to annual amount of $2.32/share • $5.5 billion in 2009 share repurchases • Dividends and share repurchases returned $17 billion to shareholders from 2008 through 2009. • New three year share repurchase program will begin in May 2010 and will amount to $12 billion 2009 Philip Morris International Annual Report page 4 Management Assessment

  26. PM’s own organic 2009 unit sales volume declined 1.5% compared to their numbers achieved in 2008. • Management explains that this is almost completely attributable to the economic downturn, and point out that all of PM’s competitors faced similar pressures. • Strong overall market share growth. • Any specific markets that encountered the threat of loss of market share from the tougher economic climate were boosted by new product launches. 2009 Philip Morris International Annual Report page 3 Management Assessment

  27. Annual overall, non-organic sales growth target is 4-6% • This number was achieved in 2009 with a 5.3% sales increase over 2008. • PM has pricing freedom in all but two markets, Japan and Korea. • Strong pushes in those areas to secure pricing freedom by the end of 2010. 2009 Philip Morris International Annual Report page 3 Management Assessment

  28. Increasing exposure in emerging markets through acquisitions and partnerships • In Feb. 2010, PM announced a partnership with FTC in the Philippines • Philippines is among the largest global cigarette markets • FTC is one of the five largest privately-owned cigarette companies in the world • Additional Acquisitions in Canada, Columbia, Sweden, and Norway • PM is applying a unique branding strategy to their flagship brand, Marlboro. • They are offering the traditional Red flavor, a stylish and refined Gold cigarette, and the fresh minty flavor that is popular in Asia and Latin America. 2009 Philip Morris International Annual Report pages 4 and 9-11 Management Assessment

  29. CAPM Cost of Equity = 6.70% • Annualized ROI (Jan. 2009 – Sep 2010) = 14.87% - Used for 2010-2016 FCF’s • Annualized ROI (since March 2008) = 12.75% - Used for terminal FCF • 5% return on debt. • The estimated 2010-2016 rate of return was chosen based on our assumption that moderate growth in those years would be similar to the time period from Jan. 2009 to Sep 2010. Discount vALUE

  30. Dcf valuation

  31. sensitivity analysis

  32. Ratio valuation

  33. Reasons that Philip Morris International is an attractive investment • The company continues to expand into emerging markets • Constant dividend payments • However, we recommend that this company be placed on watch list for the following reasons: • PM went public in ’08 (during deep global economic crisis) and is too short a period to predict how the company would perform in future recommendation

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