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3 Trends To Watch Going Forward Revisited Philip Morris (NYSE:PM) has long been considered the defensive stock of choice for many investors. But over the past three years the company has hit several stumbling blocks. As a result, the stock has languished since the beginning of 2012. Excluding dividends Philip Morris has only risen 1.4% over the period, underperforming the S 500 by more than 50%, excluding dividends. As a contrarian, this kind of underperformance attracts me to the company. However, there are three key factors that are holding the company back, which I've commented on before. The Philippines One of Philip Morris' key battle grounds is the Philippines, where the company is fighting for control of the market against local competitor, Mighty Corp. To explain the situation, here's an excerpt from an article I wrote last year entitled: Philip Morris International Inc: 3 Trends To Watch Going Forward:The second point investors need to keep an eye on is Philip Morris' presence within the Philippines. While it's wise to keep an eye on Philip Morris' presence within markets around the world, the Philippines in particular is key. South East Asia is key for cigarette companies, as countries within the region still have relatively high rates of smoking prevalence. Philip Morris' main competitor in the Philippines is Mighty Corporation. Mighty has been undercutting Philip Morris by under declaring its volume of cigarettes sold, which enables the company to pay less excise tax. According to Nielsen baseline data, Mighty declared less than half the volume of cigarettes it sold during 2013. Under declaring allowed the company to maintain artificially low prices for its brands and keep its applied tax rate down. An explanation of the tax system. Now, Philip Morris has lobbied successfully for a change in the way tax is applied, to level the playing field and this is taking place. The tax regime is changing slowly over the next few years to 2017. The company is already reporting a rise in market share. (click to enlarge)Six months on and things seem to be looking up for Philip Morris in the region. The price gap between Marlboro and low cost competitors is narrowing and according to management: "The key positives for the year, clearly is the improvement in the Philippines. There's still a lot to play for here. It also appears that the strong performance in the Philippines has been more than offset by a weak performance within Australia and Japan. Japan's weakness was cause by some inventory problems during the first part of the year. And as we know, this is entirely driven by the excise driven price increase that are pretty substantial in Australia." With the tax hikes consumers are seeking out the cheapest product, which clearly isn't Philip Morris' Marlboro's, which are notorious for being the cigarette market's premium product. Reduced risk Several key products currently being developed by Philip Morris are the company's reduced risk products, or RRP's. These items, entitled HeatSticks and iQOS devices, heat tobacco at a lower temperature that traditional cigarettes the burning of tobacco at a high temperature releases more toxic chemicals. Philip Morris' new device heats tobacco to around 400 degrees Fahrenheit instead of the 1,600 degrees of a conventional cigarette. The tobacco giant has spent about $2 billion over more than a decade on the development of HeatSticks and the iQOS devices. Philip Morris believes that it will be able to sell around 30 billion units of iQOS, which would add around $700 million per annum in profit, offsetting so of the terminal decline in traditional cigarette sales. The roll out of these products began last year and so far, it seems to be going better than expected. The pilot programs were launched in Nagoya, Japan, and Milan, Italy. So far,both adult smoker and trade response is very positive and that the performance of iQOS is in line with, or exceeds key indicators that we established. More decisive data should be available at the half year. Furthermore, the iQOS flagship store concept is a success. Our logistics chain is working well and product defect and return rates are much lower than we had anticipated. In Milan, where the selling channel is limited by design to a subset of the tobacconist universe and consumer communication is severely restricted. iQOS device penetration has, as expected, lagged that of Nagoya. However, HeatSticks sales reflect a higher full conversion rate, consistent with the characteristics of the market. Based on our latest estimates, iQOS awareness amongst adult smokers has reached approximately 16%. Other indicators are in line with Nagoya. In both markets, Marlboro HeatSticks are subject to a lower excise tax rate than cigarettes. Given the positive initial performance of iQOS, we are confirming our plans to commence national expansion in Japan and Italy, as well as pilot or national launches in additional markets later this year. These launches will be supported by a new release of iQOS that incorporates feedback from the pilot market and features a variety of colors and textures to broaden the product's appeal amongst adult smokers." It'll be really interesting to see how this experiment works out for the company over the next 12 months. It could be a game changer. It already seems to be working well with customers. Shareholder returns My third and final point is shareholder returns, or in this case Philip Morris' diminishing shareholder returns. Philip Morris has been returning more cash to investors than it could afford over the past few years and now the company is paying for its. An article, published in the FT, which I quoted before really sums up the company's situation: