Philip Morris International shouldn’t be too negatively affected by Japan’s proposal to raise taxes on tobaccco, according to Stifel Nicolaus.
The proposed legislation includes a tax increase of 70 yen (76 cents) per pack and is accompanied by a 5 yen per cigarette or 100 yen per pack increase in the market, writes Stifel Nicolaus in a note.
If the legislation goes through and the full price of 100 yen per pack of cigarettes is enacted, prices of PMI’scigarettesmall.biz/buy/marlboro could rise by about 30% to 430 yen from the current price of 330 yen in Japan.
At first glance, all this would seem worrying to PMI, especially given the rigorous channels that tobacco companies have to go through in order to raise prices in Japan and compensate for any demand shortfall.
“Japan has been missing one key element found in nearly every other major market around the world — pricing,” the analysts wrote. “The robust decline in this market due to the aging population and lower incidence of smoking has not been met with the usual profitable scenario we find in other markets (France, Germany, U.K., etc.), where pricing goes up to more than make up for the decline in volume.”
“Japan is a bit stickier in this instance because the Ministry of Finance has to approve price increases.”
Stifel’s research, nevertheless, shows that the Japanese government is allowing Marlboro prices to move up at roughly 10 yen per pack over and above the tax increase and is open to allowing Japan Tobacco, in which it owns a 50% stake, and PMI, which together account for about 90% of the country’s market, to grow profits.
According to Stifel’s calculations, it seems that PMI products have become a staple good for many smokers. With a 0.4 price elasticity, PMIs customers are unlikely to be scared off by price changes within reasonable limits.
Even though it contributes only 7% of Philip Morris volumes, PMI derives about $950 million or 9% of its operating profit from Japan, according to investment firm Stifel Nicolaus.
Stifel has refrained from increasing its earnings estimates for PMI until the tax is final and pricing is decided, but does see a potential 5- to 7-cent benefit to earnings per share under the current terms.
Philip Morris International stock ended the day down 0.5% at $48.80, while British American Tobacco rose 1.9% to $64.50.
- Altria was up 1.5% at $20.20,
- Lorillard edged 0.1% lower at $78.60, and
- Reynolds was down 0.2% to $53.30.
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