William John Market Report 09-08-21
William John Market Report 09-08-21Category: Reports
International tobacco company Phillip Morris, which owns the famous Marlboro brand, has been making headlines in recent weeks. With a market capitalisation of over $150 billion and annual net revenue of $28.6 billion in 2020, the company is still thriving in an ever increasingly health-conscious world.
Assessing their stock price over the past 12 years, Phillip Morris was trading at $32 per share (taking the opening price of the month) on the New York Stock Exchange during 03/09. 2009 was chosen as the first year to observe stock price data as the Financial Crisis would have affected data throughout 2007 and 2008 and, more significantly, online financial data prior to this is hard to find given the internet was still very much in its infancy – however one thing is clear – the stock price as an extrinsic measure of the company’s past, present, and future performance looked dim.
The 2000’s would not have been a favourable time period to be a Phillip Morris executive. According to Action on Smoking and Health’s “Key dates in tobacco regulation from 1962-2020” report, the parliaments of the U.K. and European Union governments passed numerous bills focused on tobacco advertising, health warnings, raising of tobacco duties and this ultimately culminated in the publishing of the Health Act 2009. Consequently, from 2000 to 2010, the adult smoking rate for Great Britain (16+) dropped from 27% of the population to 20%.
Despite this grim period for the tobacco industry, which on the contrary has had such benefits for public health, the world’s largest tobacco company has survived and rebounded. Observing the company’s stock price since 2009:
Source: William John Analytics, Yahoo Finance
On a per share basis, the company is trading at 3.1x share value in 2021 relative to 2008. The company has had a “memento mori” in recent years – a recognition that its tobacco rooted business model will be its downfall – and has been attempting to diversify its business into “Beyond Nicotine” products. This is likely to be the key determinant of investor confidence in the company and the company’s moves in recent times will have undoubtedly reinforced this confidence.
Its “Beyond Nicotine” strategy has included the acquisition of Danish medical chewing gum maker Fertin Pharma for $820 million, the acquisition of U.K. inhaler group Vectura for over £1 billion and the development of its own flagship IQOS product, which heats tobacco avoiding many of the health toxins associated with burning tobacco. Phillip Morris’s “reduced-risk” products, including its IQOS product, generated 30% of its 2021 first quarter revenue. This “Beyond Nicotine” strategy that has been implemented is clearly propelling a shift in revenues for a company that needs to revamp its business model and refresh its image.
Its recent transactions are evocative of the company’s future. At the end of July, Phillip Morris’s chief executive, Jacek Olczak, said the company “could see the world without cigarettes […] and actually, the sooner it happens, the better it is for everyone” analogising a ban on cigarettes to the recently implemented ban on petrol cars from 2030. This would see its own Marlboro brand amongst its other tobacco products outlawed and such outspoken words on the future of the tobacco industry by its leader assures investors that the future of the company will be exiting from the industry as soon as possible as it aims to establish itself as a “healthcare and wellness company”.
Overall, Phillip Morris and its neighbours British American Tobacco, Altria Group, and ITC, amongst others, are pushing the frontiers for multinational brands in what may be a first in behavioural economics – reinvent a century and a half old image of a tobacconist into one of a healthcare and pharmaceutical company. Will it be successful? Its executives certainly have the outspoken confidence to believe so, and its transactions and product development thus far back up those words, but only time, further investment, and an eradication of their cigarette business in its entirety will see the company through.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.