A World of Growth for Philip Morris?

Mirror, mirror on the wall: Who is the “world’s most international tobacco group” after all?

Well, British American Tobacco (NYSE: BTI) claims to be “it,” since the company reaches consumers in more than 180 countries (although I’m not sure that my fourth-grade English teacher would approve of the grammar). Philip Morris International (NYSE: PM) calls itself “the leading international tobacco company” with 15.6% of global cigarette market share — excluding the U.S., which is of course served by former partner-in-crime Altria (NYSE: MO). But Philip Morris products are sold in only 160 countries, so there’s only one thing for “Big Phil” to do next in its quest to become the biggest and the best …

Buy and hold
Yep, Philip Morris is going on a shopping spree, to increase its global presence and show British American Tobacco something about being the “most” international. Market leadership is the name of the game for Philip Morris, holder of the precious flagship brand Marlboro. In its quest for global supremacy, Philip Morris purchased Canada’s Rothmans last year. With a cigarette market share of 33%, and a majority of the fine-cut-tobacco market in Canada, Rothmans expanded Philip Morris’ stake in that market.

Within the past few weeks, Big Phil bought privately held Colombian cigarette maker Protabaco, and pipe tobacco and snuff-maker Swedish Match South Africa. Protabaco currently holds 31.8% market share in Colombia, and it should complement Philip Morris’ existing Coltabaco operations there. Swedish Match South Africa will deliver market-leader status to Philip Morris, since it sells 31% of all tobacco consumed in South Africa.

Colombia isn’t a bad place for Philip Morris to grow. Although the country just reported a 0.6% contraction for its last quarter, Colombia’s economy grew more than expected, and it’s just hitting the recession threshold that the U.S. and others started to see in 2007. South Africa has also just hit recession levels, with a 6.4% decline for the first quarter, but the government is forecasting only one more quarter of contraction before things pick up. And the International Monetary Fund is predicting that Canada’s growth rate will be double that of the U.S. next year (although that might not be saying much).

Is it time to sell?
Acquisitions, mergers, strategic alliances: Whatever you want to call them, partnerships and purchases are the name of the game for Big Cigs, especially when it comes to global growth. Philip Morris may be formally out of the game in the States, but its counterpart, British American Tobacco, possesses 42% of Reynolds American (NYSE: RAI). Reynolds is second in U.S. cigarette market share, while Lorillard (NYSE: LO) continues to light things up in third place.

Hey, acquisition isn’t a bad way to drive expansion when organic growth starts to falter. Certainly with increased regulation of the tobacco industry worldwide, it would be nearly impossible to launch new global operations to spark growth, even for a company with deep pockets like Philip Morris. And it’s not as though the company isn’t establishing its own global face: The company opened a new R&D center in Switzerland in May. With its green-focused design and lakewater cooling system, its environmentally-friendly digs are built for developing safer tobacco products, according to the company. Kind of reminds you of its half-brother Altria’s pseudo-partnership with the FDA to regulate tobacco products.

Looking forward
Philip Morris reports earnings this week, so we’ll see if the global recession hits into results. Last quarter, overall volume remained flat, and earnings were hit by currency fluctuations. Flagship brand Marlboro experienced a 2.4% drop in volume for the quarter, with duty-free sales and Russia premium smoking rates declining. With almost half of Russia lighting up, it’s not a good thing for Philip Morris that folks are looking into cheaper brands, but not necessarily surprising, considering that the Russian economy contracted by 10.1% in the first half.

Global growth with an eye on corporate responsibility is all the rage: Just ask Wal-Mart Stores (NYSE: WMT) and McDonald’s (NYSE: MCD). Whether Philip Morris International can successfully market itself as a healthy choice for investors remains to be seen. For now, it will have to settle for being the world’s “almost” most international tobacco group.

source: http://www.fool.com

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