1. Philip Morris International
December 2, 2010
Katsy Douangvichit
Nate Evett
Rajani Meka
Tom Wang

2. Agenda Company Overview Industry Overview Recent Financial Results
Competitors
SWOT Analysis
Porter’s Five Forces
Management Assessment
Financial Valuation
Recommendation

3. Company overview
Headquartered in New York, leading international tobacco company that sells products in over 160 countries
Spinoff from Altria on March 31st, 2008
Operations Center located in Lausanne, Switzerland
60 factories worldwide
Products include cigarettes, loose tobacco, chewing tobacco, and cigars and cigarillos.
The top player in global tobacco market with 15.4% of the market share outside of the U.S. as of 2009
2009 recorded sales: $25 billion
Employs over 77,000 individuals
NYSE ticker symbol: PM
Currently trading at $57.70.

4. Brands
PM has the industry’s strongest and most diverse portfolio consisting of blends and styles across 150 districts and more than 1,900 variants
7 of the world’s top fifteen brands belong to PM
World’s # 1 cigarette brand since 1972 and one of the most powerful trademarks amongst all consumer products
In ’09, its volume outside U.S exceeded 302 billion, which is larger than the sum of top four global brands
L & M is the world’s fourth largest brand

5. Recent Stock Performance

6. WHY PM?
Philip Morris International falls under the consumer staples sector and tobacco industry which helps in diversifying our current portfolio
PM is the leader of global tobacco industry
Recently listed on NYSE

7. Industry overview
Global Tobacco market is highly concentrated at the top end with top three players accounting for 44.4% share of total value
 Philip Morris International, British American Tobacco, Japan Tobacco
The tobacco industry consists of retail sale of cigarettes, loose tobacco, chewing tobacco, cigars and cigarillos.

8. Global market segmentation

9. Industry performance
The global tobacco industry generated $429.3 billion in ‘09
The global tobacco industry grew at a steady rate between 2005 and 2009 with a CAGR of 3.1% and is expected to follow a similar trend in the forthcoming 5 years
Source:

10. Factors impacting the industry
Government Regulation
Excise Taxes
Legislative compliance requirements
Advertising bans
Social and Economic trends
Health consciousness
Percentage of smokers
Anti-smoking campaigns
World price of tobacco
The major economic factor that hampers growth is taxes
Available resources
Tobacco can be grown on anywhere because of its non-specific growing conditions
Technology
Technology plays a major role in innovation to create less riskier products
Inventory systems
Shipping Options

11. Government regulation: Impact of Taxes
Source:

12. Social and economic trends
Percentage of smokers is declining in USA and so is the demand for wholesalers
Adverse public attitudes towards smoking due to more awareness
Source:

13. Availability of resources

14. Global cigarette consumption
The total number of smokers worldwide should increase due to the increase in the world’s population by 2030, however due to better awareness and strict regulations the number is expected to stay steady
Source:

15. Competitors Market Share

16. Competitors British American Tobacco
Known for their commitment to purchase tobacco leaves from environmentally responsible and sustainable sources
Employs over 60,000 people worldwide with over 50 factories
Has over 100 years of experience in the global tobacco industry
Over more than 250 brands in portfolio of tobacco products
Kent
Largest premium brand sold in more than 70 countries
Key markets are Russia, Japan, Eastern Europe, and Chile
Lucky Strike
Launched in 1871, and is one of the longest established trademarks in the tobacco industry
Sold in more than 60 countries. Key markets are Argentina, France, Germany, Japan, Spain, Chile, and Italy

17. Competitors Japan Tobacco
Employs over 25,000 people in 89 offices and 29 factories around the world
JT brands are sold in over 120 different countries
Winston
Launched in 1954 and was one of the world’s first filter tipped cigarettes
No 2. top-selling brand in the world and it is distributed in over 80 countries
Camel
Launched in 1913
Sold in over 100 countries and is the 5th biggest global tobacco brand

18. Competitors Imperial Tobacco
Business strategy also revolves around making acquisitions
Employs over 38,000 individuals with 51 factories worldwide
Over 100 years in tobacco industry
Tobacco products available in over 160 countries
Brands
Davidoff
Sold in over 100 markets worldwide.
Key markets are Taiwan, Greece, and the Middle East.
Gauloises Blondes
Largest volume cigarette brand and is available in more than 70 markets

19. SWOT Analysis Strengths Strong financial budget
Well-known brands in cigarette market
Prestigious image of Marlboro
Strong distribution Channels
Successful partners in foreign markets
Weaknesses
Tobacco produces considerable health risks to users
Insufficient and inadequate communication with public

20. SWOT Analysis Opportunities
Growing new markets in developing countries
Chance to use brands in different sectors
Creating next-generation products with less harm than traditional tobacco products
Merging or forming strategic alliances with local corporations in foreign markets
Threats
Deaths caused by cigarette
Social campaign against cigarette
Legal barriers against cigarette consumption and advertisement
Aggressive marketing campaign of competitors
Increasing prices in tobacco crops

21. Porter’s five forces Bargaining Power Suppliers – Low
PMI does not grow tobacco and it must find tobacco suppliers
PMI is so big that suppliers would lose a lot of business if PMI ended their relationship
Threat of Substitutes – Low
Increasing awareness of health issues related to smoking
Smokeless Tobacco
Barriers to Entry – High
High level of government regulations
Many lawsuits involved with use of tobacco

22. Porter’s five forces Bargaining Power of Buyers – Low
No other substitutes for a consumer that is dependent on addictive product
Industry Rivalry – High
Marlboro brand ‘s volume outside the U.S. was 302 billion cigarettes, larger than its next three competitors combined
15.4% market share globally
Strong competition in Asia

23. Recent Financial results
10-K Report

24. Dividend history
Listed in March 2008 at NYSE

25. Management Assessment
Very strong philosophy of returning value to shareholders
In Sept. 2009, increased quarterly dividend by 7.4% to annual amount of $2.32/share
$5.5 billion in 2009 share repurchases
Dividends and share repurchases returned $17 billion to shareholders from 2008 through 2009.
New three year share repurchase program will begin in May 2010 and will amount to $12 billion
2009 Philip Morris International Annual Report page 4

26. Management Assessment
PM’s own organic 2009 unit sales volume declined 1.5% compared to their numbers achieved in 2008.
Management explains that this is almost completely attributable to the economic downturn, and point out that all of PM’s competitors faced similar pressures.
Strong overall market share growth.
Any specific markets that encountered the threat of loss of market share from the tougher economic climate were boosted by new product launches.
2009 Philip Morris International Annual Report page 3

27. Management Assessment
Annual overall, non-organic sales growth target is 4-6%
This number was achieved in 2009 with a 5.3% sales increase over 2008.
PM has pricing freedom in all but two markets, Japan and Korea.
Strong pushes in those areas to secure pricing freedom by the end of 2010.
2009 Philip Morris International Annual Report page 3

28. Management Assessment
Increasing exposure in emerging markets through acquisitions and partnerships
In Feb. 2010, PM announced a partnership with FTC in the Philippines
Philippines is among the largest global cigarette markets
FTC is one of the five largest privately-owned cigarette companies in the world
Additional Acquisitions in Canada, Columbia, Sweden, and Norway
PM is applying a unique branding strategy to their flagship brand, Marlboro.
They are offering the traditional Red flavor, a stylish and refined Gold cigarette, and the fresh minty flavor that is popular in Asia and Latin America.
2009 Philip Morris International Annual Report pages 4 and 9-11

29. Discount vALUE CAPM Cost of Equity = 6.70%
Annualized ROI (Jan – Sep 2010) = 14.87% - Used for FCF’s
Annualized ROI (since March 2008) = 12.75% - Used for terminal FCF
5% return on debt.
The estimated rate of return was chosen based on our assumption that moderate growth in those years would be similar to the time period from Jan to Sep 2010.

30. Dcf valuation

31. sensitivity analysis

32. Ratio valuation

33. recommendation
Reasons that Philip Morris International is an attractive investment
The company continues to expand into emerging markets
Constant dividend payments
However, we recommend that this company be placed on watch list for the following reasons:
PM went public in ’08 (during deep global economic crisis) and is too short a period to predict how the company would perform in future