Philip Morris International Returns to Modest Growth

By Markets

The past couple of years have been a tough period for Philip Morris International (NYSE: PM). The global tobacco giant and former Altria Group (NYSE: MO) subsidiary has had to deal with adverse effects of a strong dollar that have prevented it from posting financial results that align with the organic growth in its underlying business, and that has led to subpar dividend increases and suspended stock buyback efforts. Yet coming into its third-quarter financial report, Philip Morris investors hoped that the company's challenges would start to ease, allowing more of its fundamental strength to show through. Philip Morris' report did indeed have some positive signs in it, and investors hope it marks a milestone toward an even brighter future. Let's look more closely at what Philip Morris International said and what lies ahead for the cigarette giant.

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Image source: Philip Morris International.

Philip Morris gets moving in the right direction

Philip Morris International's third-quarter results were solid. Revenue net of excise taxes climbed almost 1% to $6.98 billion, which was slightly better than what most investors were expecting to see. Net earnings climbed 2.2% to $2.03 billion, and after making some allowances for one-time items, adjusted earnings of $1.25 per share were up $0.01 from last year's quarter and topped the consensus forecast for a flat year-over-year performance on the bottom line.

Looking more closely at Philip Morris' results, one key element to the company's recovery came from the near-disappearance of currency-related issues. The tobacco giant said that unfavorable currency impacts cost the company just $0.04 per share in earnings, down by half from the second quarter, and the hit to revenue fell below the $200 million mark for the quarter. Without those impacts, earnings would have risen 4% on a 3.6% rise in revenue net of excise tax.

Yet once again, Philip Morris took a big hit in cigarette shipment volume. Shipments amounted to 207.1 billion, down 5.4% from the year-ago period, and that was an accelerating decline compared to the previous quarter. The worst declines came in Asia and in the Latin America and Canada segment, with only the European Union managing to post a small increase in shipments.

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From a bigger-picture perspective, Latin America and Canada also remained the troubled region in the Philip Morris empire. Revenue there fell almost 12%, sending operating company income down 24%. Even taking into account the heavy currency pressure in the region, it was still the worst performer among Philip Morris' four major geographical segments. Asia and the European Union finally benefited from currency moves, with Asia in particular seeing nearly 8% growth in net revenue on better than 10% gains in operating company income.

What's ahead for Philip Morris?

CEO Andre Calantzopoulos noted that Philip Morris International's results were in line with its expectations, and he expressed confidence about the near future. "We are confident that we will achieve our full-year reported diluted EPS forecast," Calantzopoulos said, although the CEO also noted that "we continue to anticipate annual volume in line with the September year-to-date decline of 3.9%, despite temporary volume weakness this quarter."

Specifically, Philip Morris reaffirmed its earnings guidance from its late September announcement, calling for earnings of $4.53 to $4.58 per share. That estimate reflects expectations for about $0.35 per share in downward pressure from the strong U.S. dollar.

One particularly important source of potential future growth lies in Philip Morris' line of reduced-risk products. The company reported that its iQOS HeatSticks system continues to gain traction in the markets in which it first introduced the heat-not-burn alternative to traditional cigarettes, and its market share in Japan rose by more than half to 3.5% during the third quarter. Philip Morris hopes to use iQOS as just one part of its reduced-risk portfolio, but it's the furthest along. Moreover, it has implications for Altria in the U.S., given the partnership that Altria and Philip Morris International have in developing various reduced-risk products.

Philip Morris shareholders were generally pleased with the report, sending shares up more than 1% on the day of the announcement. If currency impacts keep waning and the company can pursue greater growth initiatives, then Philip Morris could see even stronger financial results in future quarters.

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