How Will The Brexit Impact Philip Morris?

Global tobacco giant Philip Morris International (NYSE:PM) saw its stock decline 4.1% in the aftermath of the UK’s vote to leave the European Union. This was not only due to a general weakness in the overall market, but also as a result of concerns regarding the company’s sales and profitability in Europe, following the historic vote. Some of the factors that may have an impact on the company are highlighted below.

1. A Weakening Pound

The value of the pound has fallen considerably since the Brexit vote, and as of Monday morning, it was down 10% from where it traded on Thursday, before the election results were declared. Philip Morris does not consider the UK to be a key market in the European Union, which are considered to be France, Germany, Italy, Poland, and Spain. Since no data is provided for the shipment volume in the region, it can be assumed to be less than that for the key markets. In Q1 2016, the lowest volume in the key markets was of four billion units. Hence, in the worst case scenario, the UK contributed to ~8% of the EU volume, or about $149M in revenue, net of excise. This comes to about 2.5% of the net revenue for the company.  As the falling pound will not make any impact on the shipment volume, the stronger dollar would result in lower revenue in dollar terms, on account of the translation effect, and would not be a significant figure.

2. Disruption In The EU

Philip Morris faces problems on account of a high exposure to the European Union. In the first quarter of 2016, the region contributed to almost a quarter of its shipment volume and a disproportionately higher share in the revenue and operating companies income. Any disruption in the region that may hamper or reduce the consumption of cigarettes would prove to be harmful to the company, as it has proven to be one of its most important segments.

3. Decline In The Euro

While the Euro didn’t fall as much as the pound, in comparison to the dollar, this currency impact could be a source of sharp decrease in the company’s revenues. This decline has also negated the gains made by the currency during 2016. A devaluation of the earnings from the region in 2016 could result in another year of sluggish growth for PM.

4. Tobacco Is Considered To Be A Resilient Business

The tobacco industry is considered as a safe haven during times of economic stress or crises. During a period of volatility, investors usually turn to resilient businesses, such as tobacco companies, due to their loyal customer base and a solid dividend income. With a delay in an interest rate hike by the Fed in the US, such high-yield stocks are expected to become favorites with investors.

5. Fall In The Treasury Rates

As a result of the high volatility in the stock market, investors have flocked to the safety of US treasury notes, instead of riskier assets such as stocks, pushing their interest rates lower. The yield on the 10-year Treasury note ended Tuesday at 1.46%, a sharp fall from 1.579%, the rate before the results of Thursday’s vote were declared. This decline in the interest rate can be good for the debt-laden Philip Morris. It can give them the opportunity to refinance their current debt obligations, in particular, the long term ones with higher rates, resulting in a greater level of cash flow and improvement in the company’s bottom line. As can be seen in the table below, Philip Morris’ long term debt mostly comprises of US dollar notes, some with interest rates as high as 6.375%.

Have more questions on Philip Morris? See the links below:

• What Effect Will The Plain Packaging Ruling In Canada Have On Philip Morris?
• What Effect Will A Tobacco Tax Hike Have In New Zealand?
• How Will Philip Morris Perform In 2016?
• Why Has Philip Morris’ Price Risen ~17% This Year Despite An Earnings Miss?
• How Did The Market Share For Philip Morris Change in Q1 2016 In EU And Its Key Markets, As Compared To Q1 2015?
• How Did The Revenue And Operating Companies Income In Each Region Change In Q1 2016, As Compared To Q1 2015?
• Philip Morris Misses Q1 Revenue And EPS Estimates
• Will Philip Morris Beat Expectations This Earnings Season?
• How Did Philip Morris Perform In The European Union, And Its Key Markets There, In 2015?
• How Did Philip Morris Perform In Russia, Given The Currency Headwinds And Excise Tax Rise?
• How Has Philip Morris Fared In Comparison To Its Peers?
• How Has Philip Morris’ Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Philip Morris’ Revenue And EBITDA Composition Changed In The Last 5 Years?
• How Will Philip Morris’ Revenue And EBITDA Change In The Next 3 Years?
• Philip Morris: Year 2015 In Review
• By What Percentage Did Philip Morris’ Revenue & EBITDA Change In The Last 5 Years?
• What is Philip Morris’ Fundamental Value Based On Expected 2016 Results?
• What is Philip Morris’ Revenue And EBITDA Breakdown?

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