Philip Morris International Inc. (NYSE:PM), British American Tobacco PLC (ADR) (NYSEMKT:BTI) and Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) are the leading cigarette and tobacco-product manufacturers in the world. In the last quarter, the enforcement of stringent laws restricting cigarette endorsement together with lagging demand due to weak economic conditions pulled down the revenue for major tobacco producers. Amid this difficult business cycle, in the following article we will analyze how British American Tobacco PLC (ADR) (NYSEMKT:BTI) managed to stay ahead of both of its major rivals.
Despite strong pricing, the latest quarter had been rough for Philip Morris International Inc. (NYSE:PM). Total revenue and net income declined by 2.5% and 7.3%, respectively, due to lower cigarette volumes in key markets. Declines in shipment volume mainly reflected in Europe are due to an unfavorable impact of excise-tax driven price increases, a recessionary European economy and increased illicit trade. To my astonishment, the company managed to take a hit of 5.7 % in its revenue in the growing Asian market, which is easily attributable to the higher costs the company is incurring. With a 60% increase in the tobacco tax in the Philippines, Philip Morris International Inc. (NYSE:PM) is feeling the hit because of its large market share in the country.
However, Philip Morris International Inc. (NYSE:PM) has made a few smart moves in order to strengthen its presence in the emerging markets. It recently bought back 20% of its stake held by Grupo Carso in its Mexican business. The company now owns 100% of its Mexican business; this buyback will prop up EPS. Philip Morris International Inc. (NYSE:PM) has deeply benefited from increased sales in Japan; the company established its brand in the country since Japan’s tobacco’s production stopped in the aftermath of a seismic disaster and tsunami. Moreover, it also acquired Fortune Tobacco in the Philippines, building its stronghold in the growing Asian and emerging markets. These moves will offset the lower demand in Europe.
Emerging market exposure
British American Tobacco PLC (ADR) (NYSEMKT:BTI), due to its sales structure, is less vulnerable to volume declines because of its low sales dependence on Europe. Europe only accounts for one-10th of the total sales. The rest of the sales come from the company’s international business, particularly the emerging markets. Amid lower demand cycles, the company still managed to increase its revenue by 5%, which is sustainable in the long run.
British American Tobacco PLC (ADR) (NYSEMKT:BTI) is re-entering Myanmar through a joint venture with IMU enterprise; previously the company had a market-leading position in Myanmar, which it aims to rebuild. British American Tobacco PLC (ADR) (NYSEMKT:BTI) is aggressively pursuing the Asian markets, Myanmar, bordering China, Laos, Thailand and India, provides the company with an opportunity to boost its sales and enhance its market share in Asia. Moreover, the company is heavily investing in tobacco alternatives, or non- combustible cigarettes since the world will witness a rapid decline in tobacco use.
Headwinds for Imperial
Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) is also experiencing the headwinds due to difficult trading conditions in Europe, particularly due to stern government regulations and excise- tax driven prices. Company profits fell by 6.5%, with a 2 % decrease in revenue. Realizing that the market backdrop would remain tough for some time, Imperial Tobacco Group PLC (ADR) (NASDAQOTH:ITYBY) is resorting to cost savings and a slightpull back in its investments to boost margins.