Philip Morris (PM) Q3 Earnings Beat; Maintains 2016 View

Philip Morris International Inc. (NYSE:PM) reported adjusted third-quarter 2016 earnings per share of $1.25 that beat the Zacks Consensus Estimate of $1.23 by 1.62%. Additionally, earnings gained 1% from the prior-year quarter figure driven by higher sales.

Excluding an unfavorable currency impact of 4 cents, earnings inched up 4% year over year.

Revenues & Margins

Net revenue was up 1% (up 3.6% excluding currency) to $7.0 billion and was in-line with the Zacks Consensus Estimate. The sales gain is attributable to higher sales in Asia and European Union region. However, the increase was partially offset by lower sales in the tobacco category, stemming from the shift of customer preference away from tobacco products. Cigarette shipment volumes also fell 5.4% to 2.1 billion units, primarily owing to a decline in total market share.

Philip Morris' cigarette market share increased in a number of markets, including Belgium, Canada, Czech Republic, France, Kuwait, Mexico, Netherlands, Poland, Saudi Arabia, Spain, Switzerland, Turkey and United Kingdom.

The company's gross profit remained flat year over year at $4.6 billion as lower cost of sales was neutralized by reduced revenues. Operating income gained 1.2% year over year to $3.1 billion due to higher marketing, administration and research costs.

Segment Details

Net revenue in the European Union region grew 3.6% year over year to $2.2 billion. Excluding the impact of currency, net revenue went up 3.9%, primarily due to favorable pricing in Germany, Spain and Italy. Moreover, cigarette shipment volumes also gained 0.4% to 52.0 billion units.

Market share in the region increased 0.4 percentage points (pp) as the increase in Marlboro’s market share was offset by the decrease in overall cigarette market share.

Net revenue in the Eastern Europe, the Middle East & Africa (EMEA) region declined 4% year over year to $1.9 billion. Excluding the impact of currency net revenue dipped 3%, primarily owing to unfavorable pricing in Russia and North Africa.

Shipment volumes decreased 5.4% to 72.2 billion units, chiefly due to unfavorable pricing in North Africa and Russia.

The company recorded net revenue from Asia of $2.1 billion, up 7.7% (up 4.7% excluding currency) from the prior-year quarter, neutralized by unfavorable volume/mix, mainly in Australia.

Shipment volumes of 62 billion units slumped 9% because of reduced demand in Japan.

In Latin America and Canada, revenues declined 11.7% (up 1.7% excluding currency) to $710 million. Revenues, in terms of constant currency, increased year over year mainly in Argentina due to the impact of excise tax-driven price increases.

Shipment volumes of 21.3 billion units dropped 8% year over year due to lower volumes in Argentina.

Financial Update

During the quarter, Philip Morris did not repurchase any shares. It, however, declared a hike in quarterly dividend by 2% to an annualized amount of $4.16 per share. Philip Morris exited the quarter with cash and cash equivalents of $4.99 billion compared with $2.9 billion in second-quarter 2016. Long-term debt was $29.69 billion in the third quarter compared with $26.68 billion in the previous quarter.

Guidance

For 2016, management reaffirmed its GAAP-earnings projection. The company now expects GAAP-earnings in the range of $4.53–$4.58 compared with $4.42 per share reported in 2015. The company anticipates currency impact of 40 cents per share. Excluding the currency impact and one-time restructuring charges, earnings are likely to increase approximately 10–12%.

In order to combat macro issues, the company, along with other tobacco majors like Reynolds American Inc. (NYSE:RAI) , British American Tobacco (NYSE:BTI) and Altria Group Inc. (NYSE:MO) , is focusing on growth of the alternative tobacco product category.

Philip Morris currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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