Philip Morris Looks for a Big Earnings Boost, but Will It Deliver?

By Dan Caplinger Markets Fool.com

Philip Morris International (NYSE: PM) has had to overcome substantial obstacles recently, and despite a solid total return of almost 9% in 2016, investors have been increasingly worried about the international tobacco company lately. Even though Philip Morris has worked hard to produce impressive results on a local-currency basis, much of that growth has disappeared under the weight of a strong U.S. dollar. As investors prepare for Philip Morris' fourth-quarter financial report on Feb. 2, they expect a big jump in earnings from year-ago levels, but they also want reassurance that the company can start seeing its dollar-denominated sales and net income figures maintain consistent growth. Let's take an early look at Philip Morris International to see what investors are thinking and looking to see from the tobacco giant.

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Image source: Philip Morris International.

Stats on Philip Morris International

Analyst EPS Estimate

$1.13

Change From Year-Ago EPS

40%

Revenue Estimate

$6.70 billion

Change From Year-Ago Revenue

4.9%

Earnings Beats in Past 4 Quarters

1

Data source: Yahoo! Finance.

Can Philip Morris International produce strong earnings growth?

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In recent months, investors have gotten a lot more pessimistic about Philip Morris International's earnings prospects. They've reduced their fourth-quarter projections by $0.05 per share, and even more alarmingly, they've cut their full-year 2017 outlooks by between 4% and 5%. That uncertainty has shown up in its stock, which has made no progress at all since mid-October despite a sizable stock market rally.

Philip Morris International's third-quarter results were encouraging because they showed that the tobacco giant was able to return to a growth trajectory. Those gains weren't huge, amounting to a 1% rise in revenue and just a $0.01 per share boost in earnings, but they were enough to prove the success of Philip Morris' fundamental business. Of particular note was that unfavorable impacts from the strong U.S. dollar were far smaller than they had been in past quarters, amounting to just $0.04 per share of downward pressure on earnings and less than $200 million in lost revenue. Plunging shipments were again problematic, but Philip Morris was still able to produce decent growth in the low- to mid-single-digit percentage range in its fundamental business on a local-currency basis.

Still, the troubling thing Philip Morris has had to wrestle with in recent months is a resurgence in the value of the dollar, which could derail its earnings growth. Since the beginning of October, the Dollar Index has climbed more than 5%, with the euro losing almost 5% of its value against the dollar, and the Japanese yen falling an even steeper 12%. The dollar's move has come in the wake of U.S. economic strength that led the Federal Reserve to boost interest rates in December and predict three more rate hikes during 2017, even while central banks elsewhere are generally looking for ways to further ease their respective monetary policies. Moreover, some concerns about the perception of U.S. corporations overseas in light of anticipated trade tensions under the Trump administration have hit the stock, although proposed tax breaks could be a big boon for Philip Morris if they pan out.

Still, Philip Morris has a lot of hope for its groundbreaking emphasis on reduced-risk products. The company believes products like its iQOS heat-not-burn alternative to traditional cigarettes could eventually lead to a complete transformation in the industry, and it is working hard to build support for the heated-tobacco concept. In December, Philip Morris filed its application with the U.S. Food and Drug Administration to gain approval for the reduced-risk product. By doing so, it hopes not only to reap licensing revenue from selling iQOS in the U.S., but also convince other regulators across the globe that the product has definitive health advantages over regular cigarettes and other traditional tobacco products.

In the Philip Morris earnings report, investors will want to focus their attention on how management addresses potential currency difficulties. After having dealt with the strong dollar for such a long time, shareholders had hoped that currency would stop being such a huge headwind. Yet if disparities between the health of the U.S. economy and the rest of the world continue, further currency issues could hold Philip Morris back again in 2017.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.