Philip Morris International Inc. (PM), Reynolds American, Inc. (RAI), British American Tobacco PLC (ADR) (BTI): Three Tobacco Companies And Their Issues Ahead

The tobacco industry is facing tough times as global demand of cigarettes has declined due to anti-tobacco campaigns, price increases, and an unfavorable excise tax environment.

Furthermore, strict anti-smoking government regulations all around the world, diminishing social acceptance of smoking, higher manufacturing costs, and increased expenses in sales, marketing, and distribution will keep eroding profitability.

Let’s see how three tobacco companies are facing the situation.

Philip Morris International Inc. (NYSE:PM): Leading traditional segments and developing new products

Philip Morris International Inc. (NYSE:PM) is a holding company that manufactures and sells cigarettes and other tobacco products in approximately 180 countries outside of the US.

The company reported an EPS of $1.29 for the first quarter 2013, missing estimates by 4% but surpassing by 3.2% the prior-year earnings. Currency headwind and shipment volume loss in the Philippines due to an excise tax hike explain these results. Net revenue is up 1.8% compared to 1Q 2012 and reached $7.6 billion, mainly carried by favorable pricing.

Philip Morris International Inc. (NYSE:PM) is losing market share in southern Europe, Argentina and Mexico. Shipments declined 10.1% in Europe and 7.5% in LatAm but increased 1.4% in EMEA due to improved market conditions in North Africa, the Middle East, Russia and Ukraine.

Philip Morris International Inc. (NYSE:PM)’ market share is around 28% and Marlboro brand has been increasing share in 2012, reaching 9.3% share. Asia, which contributed to 37% of income in 2012, is the market with more growth potential. In addition, the company is designing a set of ‘Next Generation Product,’ to be released in 2014. The aim is to attract adult consumers offering healthier products.

Reynolds American, Inc. (NYSE:RAI): Dominant share in new segments but losing in premium brands

Reynolds American, Inc. (NYSE:RAI) is the second-largest US tobacco company. It manufactures about one of every three cigarettes sold in the United States.

The company’s earnings per share for the first quarter reached $0.72, a 14.3% up from the year-ago earnings. The drivers behind this result are bottom-line growth and positive pricing.

Reynolds American, Inc. (NYSE:RAI) is continuously innovating in the smokeless and snuff products, maintaining a dominant share in these categories. Moreover, its advancement in the e-cigarette category through its brand Vuse is promising.

The company owns the only USDA certified organic cigarette in the world. Reynolds American, Inc. (NYSE:RAI)’ super premium brand has an outstanding track record of retail market share increase. It grew from 30.3% in 2010 to 32.4% in 2012. I expect it to grow even further.