Philip Morris International Sees a Stronger 2017 Ahead

By Dan Caplinger Markets Fool.com

Philip Morris International (NYSE: PM) has had to overcome several challenges in recent years, ranging from the strength of the U.S. dollar to increased regulatory scrutiny over tobacco companies in its key international markets. However, some investors have hoped that the worst was finally behind Philip Morris, and coming into its fourth-quarter financial report, Philip Morris investors expected a sizable rebound in profits and solid sales growth. The company's results were indeed encouraging for those who've waited for a turnaround, and its guidance for 2017 suggests that times could be much better for Philip Morris in the coming year. Let's take a closer look at Philip Morris International's latest results and what the tobacco giant sees ahead.

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Image source: Philip Morris International.

Philip Morris enjoys strong sales, earnings growth

Philip Morris International's fourth-quarter results encouraged those who had been looking for signs of a full recovery. Revenue net of excise taxes jumped 9% to $6.97 billion, and that was almost double the pace of growth that most investors were looking to see. Net income soared 37% to $1.78 billion, and that produced adjusted earnings of $1.10 per share. That was $0.02 per share less than the consensus forecast among those following the stock, but it still represented a huge gain over last year's quarterly results.

Taking a closer look at the numbers from Philip Morris, segment results varied quite widely across the company's geographical reach. The Asia segment saw a huge bump in revenue, climbing 27% from year-ago levels. Europe also enjoyed growth, with a 5% sales gain in the Eastern Europe, Middle East, and Africa outpacing the tepid 0.5% rise in the European Union. Latin America and Canada remained the worst region, with sales falling nearly 5% due largely to weak currencies. Operating income from the various regions showed broad-based success in local-currency terms, with Asia profit nearly doubling and EU bottom-line figures rising by nearly half. Eastern Europe was the big laggard, with segment profit falling 11% in dollar terms.

Reduced-risk product sales also continued their upward climb. Philip Morris raised $343 million in revenue in the fourth-quarter from its reduced-risk product line, up more than 60% just since the third quarter and nearly doubling what the company brought in during the first half of 2016. Nearly all of the sales came in the Asia region, and Japan was the key source of sales for Philip Morris' popular iQOS heat-not-burn tobacco product. Put another way, reduced-risk products accounted for more than half of the incremental gain in Asia-region revenue during the quarter.

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Yet perhaps the most disturbing element of the report was that currency pressure has once again returned to the income statement. The company said that unfavorable currency movements cost the company $0.13 per share in earnings, which was more than triple the damage that the strong dollar did in the third quarter of 2016. Revenue impacts were minimal at just $90 million, but a big bottom-line hit in the Eastern Europe segment accounted for much of the earnings pressure.

Also, shipment volumes were again weak. Total shipments were 200.6 billion units, down 4.4% from year-ago figures. Asia was the weakest performer regionally, and the key Marlboro brand saw shipment volumes fall more than 2% to 70.3 billion units.

Can Philip Morris see brighter results in 2017?

CEO Andre Calantzopoulos was happy with Philip Morris International's performance. "Our results last year underscore the strength of our existing business," Calantzopoulos said, "driven by our world-class brand portfolio, the enormous promise of our reduced-risk products, and the tremendous commitment of our talented employees." The CEO also highlighted the ongoing goal to focus Philip Morris more on reduced-risk products generally, as well as its December application to the U.S. Food and Drug Administration for approval of a modified risk tobacco product application for iQOS.

Philip Morris' guidance for 2017 reflected the company's optimism. The tobacco giant expects earnings of $4.70 to $4.85 per share based on current exchange rates, with revenue growth likely to exceed the typical 4% to 6% target range that Philip Morris strives to achieve. Those numbers compare well to the consensus forecasts of $4.72 per share and 2% revenue growth that most investors had expected to see.

In response, Philip Morris shareholders celebrated the news, sending the stock up 2% in early trade following the announcement. The company still has a long way to go in implementing its transformative strategy, but early signs reflect the success that Philip Morris is having in reinventing itself to adapt to changing conditions going forward.

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