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Phillip Morris International Inc. 2023 Outlook

Fair Value103.00 USD | Market Cap155.12B USD

Strategic Direction and Prospects for the Future

Philip Morris International (PMI) has set an ambitious goal to expeditiously replace conventional cigarettes with less dangerous alternatives. Their intermediate-term objectives demonstrate a strong commitment to this aim, as they anticipate substantial growth over the next three years. By 2025, PMI aims to generate more than half of its revenue from non-combustible products, an ambitious goal that, if achieved, could signal a turning point in the tobacco industry. This strategic approach is aligned with environmental, social, and governance (ESG) principles and has the potential to achieve lucrative growth in the medium term.

The Advantage of Heatsticks

The availability and use of heatsticks, cigarette-like sticks used in the iQOS device, will be essential to PMI’s success in its shift to heated tobacco products. Heatsticks are taxed less than regular cigarettes, giving PMI a favorable economic environment. Heatsticks have a net revenue per pack that is 2.4 times that of conventional cigarettes, with an excellent gross margin that is around 10 percentage points higher, at roughly 75%. While selling and administrative costs may be slightly higher at present, increased heatstick manufacturing could theoretically match premium cigarette earnings before interest and tax (EBIT).

The success of this plan, however, depends on the current taxing systems remaining in place. PMI would face increased tax pressure if heatsticks were taxed at the same rate as cigarettes in most jurisdictions. Nevertheless, PMI’s pricing strategy of heatsticks below cigarettes is not only a business plan but also a way to encourage smokers to switch to lower-risk products. It may also discourage governments from raising taxes to bridge the price gap between heatsticks and cigarettes.

Challenges in Achieving Volume Targets

PMI’s goal of achieving a heatstick volume of 140 billion to 160 billion in 2023 is ambitious, especially considering its withdrawal from the United States and Russia, which has made this target unattainable. The company is likely to rely heavily on new product development to drive further customer adoption. PMI is expected to reformulate its disposable heated tobacco product, TEEPS, in the near future, which could play a crucial role in achieving its goals.

Bullish and Bearish Views

Bulls say:

– PMI is the world’s largest publicly traded tobacco company, with a 23% global market share (excluding the United States and China), giving it significant pricing power. 

– The successful commercialization of iQOS in the United States, which is not currently factored into the stock price, could provide PMI with additional volume and revenue. 

– PMI’s focus on premium brands and consumer loyalty to Marlboro positions it advantageously in the market’s highest-priced segments.

Bears say

– Tobacco companies face persistent threats from lawsuits and stringent regulatory constraints, which could have a negative financial impact. 

– Because most of PMI’s net sales are in foreign currencies and about a quarter of its input costs are in US dollars, a strengthening of the US dollar could have a negative impact on profit growth. 

– Uncertainties about the tax and regulatory environment for cigarette alternatives exist, which could have a significant impact on the company’s future profitability.

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