Will Brexit Hit Philip Morris International Hard?

By Markets Fool.com


Image source: Philip Morris International.

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British voters decided last week that the U.K. should leave the European Union, and the fallout on international stock markets was immediate and severe. Stocks in a wide variety of industries posted sharp losses, and in general, the more exposure a company had to international markets, the greater its losses were. That was especially bad news for international tobacco specialist Philip Morris International , which fell more than 4% on Friday in the aftermath of the Brexit vote. Even though Philip Morris is typically seen as being in a recession-proof business, the uncertainty about the U.K. departure from the EU is already taking its toll on potential profits for the tobacco company going forward.

Philip Morris has minor exposure in the U.K. proper

The clearest danger of the Brexit vote for Philip Morris is the impact on the value of the British pound. The foreign currency fell sharply in the wake of the decision, and as of Monday morning, its value is down fully 10% from where it traded on Thursday before the election results were available.

In terms of this direct impact from the U.K. vote, Philip Morris is in far better shape than many of its peers in the British tobacco market. Among Philip Morris brands, only Marlboro stands in the top 10 in the U.K., and revenue of just over 900 million British pounds in 2014 gave the brand roughly 7% market share there. By contrast, Imperial Tobacco and Japan Tobacco International dominate the U.K. tobacco market, and combined, they control about five-sixths of the market.

The broader hit to Europe

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Where Philip Morris International faces more potential problems in its exposure to the broader European region. The company's cigarette shipment volume to the European Union came to almost 195 billion units in 2015, making up almost a quarter of its global distribution. The company doesn't break out Eastern Europe from the Middle East and Africa, but when you add in some portion of the company's 279 billion unit shipment volume, Philip Morris International's total share from the continent likely falls somewhere between a third and a half of its total figures worldwide.

In addition, Philip Morris gets disproportionately more of its revenue from European sales. Net revenue from the European Union amounted to $26.6 billion in 2015, adding up to more than 35% of companywide sales. EU operating income of $3.58 billion was more than a third of Philip Morris' total for all four of its major segments. Any economic disruption that affects European consumers' ability to buy cigarettes and other tobacco products could hit Philip Morris hard in one of its most important areas of the global market.

European currency woes

Even if Philip Morris International's business managed to sustain its sales figures in terms of volume, the currency impact from Brexit could also be a source of financial disappointment for the company. The euro's declines weren't nearly as sharp as those of the pound. But the euro still lost about 3% of its value on Friday, reversing a good portion of the gains that the European currency had managed to claw back during 2016.

Philip Morris International has had to deal with a strong U.S. dollar for years, and the prospects of having to endure a longer period of weak foreign currencies aren't good news for investors. Facing the potential for a devaluation of its European revenue when it translates its results into U.S. dollars, Philip Morris International could see another year of sluggish growth in 2016 if worst-case scenarios play out in Europe.

Many investors turned to U.S.-based tobacco stocks on Friday as a safe haven because of their lack of international exposure and solid dividend income. Even though Philip Morris International offers the same resilient business model as its domestic peers, the company's global focus put it in the wrong place at the wrong time late last week. Until the Brexit situation gets clearer, investors in Philip Morris need to be prepared for continued volatility in the company's share price.

The article Will Brexit Hit Philip Morris International Hard? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.