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.
British American Tobacco PLC (ADR) (NYSEMKT:BTI): Increasing revenue despite drop in cigarette sales
British American Tobacco PLC (ADR) (NYSEMKT:BTI) is the holding company of a group of companies which manufacture, market and sell tobacco products.
The company’s EPS of $6.42 with a 3% increase year over year is proof of British American Tobacco PLC (ADR) (NYSEMKT:BTI)’s decision to continue generating revenue. Management recently announced a 5% revenue increase in the first three months of the year, despite a 3.7% drop in cigarette volumes.
With a 13% of the world’s cigarette market share, British American Tobacco PLC (ADR) (NYSEMKT:BTI) is reinforcing its strong presence in the emerging markets, which represent 70% of its profits. As we know, these markets deliver superior growth compared to relatively mature markets such as Europe.
The company, through its progressive share repurchase program, is also committed to returning cash to shareholders. British American Tobacco PLC (ADR) (NYSEMKT:BTI) will return $2.4 billion to investors this year alone, compared to $2 billion last year and $1.1 billion in 2011.
Bottom line
Controlling 16.3% of the global cigarette market, Philip Morris International Inc. (NYSE:PM) has a strong portfolio of tobacco brands. In addition, its incursion in the alternative tobacco products market could help better position itself in a shifting and more regulated market.
Reynolds American, Inc. (NYSE:RAI)’ strong presence in new market segments and cost reductions initiatives are important. However, a drop in market share in premium brands such as Camel and Pall Mall represent a concern and make me remain neutral on the stock.
British American Tobacco PLC (ADR) (NYSEMKT:BTI) is solid and well-positioned in the emerging markets, which will ensure future earnings. But, it is lacking a proper acquisition and innovation strategy to help itself gain share in new market segments.
The article 3 Tobacco Companies And Their Issues Ahead originally appeared on Fool.com and is written by Vanina Egea.
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