Shares of tobacco giant Philip Morris International (PM: Charts, News) slid 3% over the past two days, after European Union officials in Brussels proposed stricter restrictions on tobacco branding on Wednesday. The proposed bill aims to increase the required size of graphic visual and written warnings to cover up 75% of cigarette packets, leaving only 25% available for branding. This would be more than double the current requirement for warnings to cover 30% of the packet. The proposal comes after two years of controversial discussion, highlighted by costly industry lobbying, the resignation of an EU health commissioner amid bribery allegations and break-ins at the offices of anti-smoking groups. A separate bill aims to ban slim and menthol flavored cigarettes, which are usually marketed to women. EU Health Commissioner Tonio Borg did not mince words, stating, “The figures speak for themselves: tobacco kills half of its users and is highly addictive.”
Philip Morris investors fear that the EU is moving towards a ban similar to the recent Australian ban, which requires all tobacco manufacturers to use completely plain, black packaging covered with graphic visual warnings. British American Tobacco and Imperial Tobacco have also been hard hit by the concerns, both sliding over 3% over the past week. The big tobacco companies are increasingly concerned that these restrictions in Australia and EU will lead to tougher restrictions in emerging markets such as Asia and Africa. Philip Morris, which has been tasked with selling its former parent Altria’s (MO: Charts, News) flagship brands – Marlboro, Parliament and Virginia Slims – in overseas markets, is especially vulnerable to changes in these markets.
Morgan Stanley analysts remained bullish regarding the growth prospects of Philip Morris and its industry peers, stating that it did not expect the new bills to have a “material impact” on industry volumes or profitability. “We take some relief that the (worst) case – mandatory plain packaging – wasn’t proposed,” stated a Morgan Stanley analyst. 576 billion cigarettes were sold in the EU last year, a decline of 100 billion since 2007. However, the continent still has the highest percentage of smokers of any region in the world at 33%, according to a recent report from the World Health Organization.
Philip Morris’ Communications VP Julie Soderlund remained optimistic regarding the EU’s recent bills. “PMI is pleased that the Commission has finally issued its proposed Tobacco Products Directive so that it now may be reviewed and debated in an open, transparent, objective and constructive manner by all concerned in the coming months,” she stated. However, Soderlund criticized that there was “no scientific evidence” that removing the branding of multinational tobacco brands would have any positive impact on health.
Soderlund also accused the EU of neglecting cheaper, tax-evading black market cigarettes, which have now become a viable alternative to larger brands due to higher excise taxes and increased regulations. Soderlund stated, “At a time when Europe can least afford it, the Commission’s proposal ignores the massive black market for tobacco products which already costs member states 10 billion euros annually, but advocates measures that will undoubtedly fuel its further growth.”
Philip Morris’ products include seven of the world’s top 15 tobacco brands, which are offered in 180 countries. Last year, the company commanded 16% of the total international cigarette market, or 28.1% excluding China and the United States. In October, the company lowered its fiscal 2012 earnings guidance to a range between $5.12 and $5.18. Analysts had been expecting $5.20. It attributed the lowered guidance to an expected slowdown across Europe, which could now be exacerbated by the newly proposed bills.
Philip Morris currently trades at 14.7 times forward earnings with a 5-year PEG ratio of 1.6. It also pays a quarterly dividend of 85 cents per share – a 3.98% yield at current prices.
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