In this paper we have analysed the performance of Phillip Morris in order to decide whether or not to invest in the company. We have completed an overview of the competitive scenario, proﬁtability and risk indicators, as well as contingencies and aspects to keep in mind for the future development of the ﬁrm. We think that in order to evaluate the current situation of the ﬁrm we have to give enough weight to quantitative and qualitative aspects and try to maintain an objective view, regardless of the fact that its products are damaging to human health. We have to keep in mind that we are evaluating the ﬁrm from the investor point of view and not as borrowers or consumers. After the detailed analysis we decided to invest our family savings in Philip Morris!
Tobacco Industry Overview
The tobacco industry is made up of a small number of companies that grow, distribute and sell tobacco and related products throughout the world. Barriers to entry to this market are high due to the size of distribution networks required and government restrictions on marketing and promotions. These restrictions stem from health warnings, which will limit the room for future growth in this already mature market. Companies often use mergers and acquisitions to expand abroad and bring down their costs by taking advantage of economies of scale. They often integrate vertically, meaning they have control over every aspects of the supply chain from production to distribution. Due to these factors, the market can be described as an oligopoly.
The industry is constantly having to deal with tightening regulations as governments look to discourage the use of their products due to health concerns. This is playing a role in decreasing the demand in the developed world, but as of now is not affecting the developing world, in fact the opposite as demand is growing in these countries. A common method used to put off smokers is increasing the taxation on the product, but as the product is addictive and therefore the demand is relatively inelastic, the producers are often able to pass on this burden to the end users. Generally speaking, tobacco companies are considered reasonable investments due to their good earnings and constant cash ﬂow streams. However, it is worth keeping in mind that lawsuits are reoccurring themes in the industry and can have a very large impact on the yearly proﬁts!
Philip Morris Overview
Philip Morris is the second largest player in the tobacco industry, with a 15% share of the global market. China National Tobacco is the largest player, currently holding a 41% market share. Three
Philip Morris International - Financial Analysis
Group C4 - Esade MBA Class of 2014 - Business Analysis to Valuation
other companies, British American Tobacco, Japan Tobacco and Imperial Tobacco round out the top ﬁve players, who comprise 81% of the market. These ﬁgures have changed very little over the last few years.
Currently, Philip Morris has a very strong position in Europe (37%), but as mentioned in the industry overview, this is a slowly declining market. This is partly due to high prices (stemming from increases in excise tax) driving customers to buy rolling tobacco and from increasing black market substitutes. The Asian market is the one with the biggest potential, but it is currently being dominated by China National Tobacco (66%). In this area, Philip Morris has a small market share (9%) and are clearly looking to improve, as China by its self consists of two ﬁfth of the global market, and Asia as whole just over half of global consumption.
Philip Morris has spent a large amount of energy & money developing their supply chain, sourcing materials from four continents, developing their product in 35 countries and selling them in over 180 countries. This operating model gives the company ﬂexibility in case of unforeseen circumstances in any region. A...