Cigarette manufacturing behemoth Philip Morris International, Inc. (NYSE:PM), based in New York City, continues to penetrate emerging markets where rising middle classes embrace Western brands. The company also is making a shrewd foray into the increasingly popular phenomenon of electronic cigarettes.
These long-term trends should benefit Philip Morris, but the maker of iconic cigarette brands such as Marlboro and L&M is getting undermined by currency devaluations around the world.
The stronger dollar is a bane for U.S. based exporters because it makes their products more expensive overseas, constrains pricing power and hurts revenue as well as margins.
The growth of the United States economy is now the envy of the world, but whether the world drags down the U.S. — and with it PM stock — remains an open question.
PM: The Paradox of Growth
This paradox of growth was all too evident in PM’s quarterly and full year earnings report, which was announced this morning before the market’s opening bell.
PM reported full year 2014 diluted earnings per share (EPS) of $4.76, down by 50 cents or 9.5%, compared to EPS of $5.26 last year. Excluding the unfavorable currency differential of 80 cents, diluted EPS was up by 30 cents or 5.7%, compared to $5.26 in 2013. Adjusted diluted EPS reached $5.02, a decline of 38 cents or 7% compared to $5.40 in 2013.
Excluding the unfavorable currency impact of 80 cents, adjusted diluted EPS rose by 42 cents or 7.8% versus $5.40 in 2013.
Cigarette shipment volume for the full year came in at 856 billion units, a year-over-year decline of 2.8%. Excluding excise taxes, full year revenue hit $29.8 billion, a year-over-year drop of 4.6%. Excluding the unfavorable currency impact, net revenue (excluding excise taxes) rose 2% year over year.
In the fourth quarter, diluted EPS came in at $1.03, down by 21 cents or 16.9% compared to $1.24 in 2013.
Management gave guidance for 2015 full-year diluted EPS in the range of $4.27 to $4.37, at prevailing exchange rates, compared to $4.76 in 2014. Excluding an unfavorable currency impact, at prevailing exchange rates, the reported diluted EPS range calls for an estimated year-over-year rise of 8%.
PM: A Mixed Bag
The mixed bag on earnings this morning belies the fact that Philip Morris has been making all of the right moves. In 2013, PM and Altria Group, Inc. (NYSE:MO), a global cigarette and table wine company, signed a partnership to develop and market e-cigarettes. Philip Morris obtained proprietary rights to sell Altria’s e-cigarettes outside the U.S.; Altria got the rights to sell tobacco products in the U.S. made by Philip Morris.
When developing countries last year started to belatedly impose tighter anti-smoking regulations on their Marlboro Man-worshipping citizenry, Philip Morris saw the handwriting on the wall. Putting aside initial doubts, PM management now has aggressively embraced the e-cigarette craze, by which a nicotine solution is heated and the vapors are inhaled via a special device.
Health experts are voicing some concerns about e-cigarettes but for now e-cigs remain largely unfettered, presenting new growth opportunities for Philip Morris as important markets such as Russia and China express alarm over rising cancer rates and clamp down on traditional smoking in their countries.
But the emergence of a leftist anti-austerity government in Greece, combined with sputtering growth in Europe, Russia and Asia, is clobbering foreign currencies — a dynamic that doesn’t show any signs of improving soon. What’s more, it’s not certain whether e-cigarettes will continue to enjoy their “wild west” regulatory status.
Until the smoke clears, PM stock faces considerable headwinds in 2015 and remains a hold at best.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
