Philip Morris Beats Earnings: Should You Buy?


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Philip Morris delivered solid financial performance for the second quarter, and the company pays big capital distributions. However, the tobacco industry is exposed to considerable risks in the long term. Should you buy Philip Morris?

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Philip Morris Beats Earnings: Should You Buy?

  1. 1. Philip Morris Beats Earnings: Time to Buy? Source: Phillip Morris
  2. 2. Introduction ➢ Philip Morris delivered better-than-expected financial performance for the second quarter of 2014. ➢ Strong pricing and market share gains allowed the company to beat revenue expectations in spite of unfavorable currency fluctuations during the quarter. ➢ The company pays an attractive dividend yield, and it has an active share buyback program. ➢ On the other hand, tobacco volume sales are still declining all over the world, and this is a major risk factor.
  3. 3. Sales ➢ Net revenues during the second quarter came in at $7.8 billion, a decline of 1.5% versus the same period in the prior year. However, this was still above analysts’ expectations of $7.7 billion for the quarter. ➢ Sales excluding currency fluctuations increased 4.5%, led by favorable pricing across all regions. ➢ However, cigarette shipment volume still declined 2.7%, to 222.8 billion units during the quarter.
  4. 4. Sales by Region Source: Philip Morris
  5. 5. Market Share Gains According to management, Philip Morris gained market share in several key markets during the quarter, including Algeria, Argentina, Austria, Brazil, Canada, the Czech Republic, France, Greece, Italy, Kazakhstan, Korea, the Netherlands, the Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Thailand, and the United Kingdom.
  6. 6. EU Market Share Source: Philip Morris
  7. 7. Falling Shipment Volume Source: Philip Morris
  8. 8. Earnings ➢ Diluted earnings per share came in at $1.17, down by 10% versus the same quarter in 2013. Excluding unfavorable currency fluctuations, diluted earnings per share increased 1.5%. ➢ Adjusted diluted earnings per share came in at $1.41, up 8.5% versus $1.30 in the second quarter of 2013, and materially better than analysts’ forecasts of $1.24 per share. ➢ Excluding unfavorable currency fluctuations, adjusted diluted earnings per share came in at $0.26, a big increase of 20% versus the same quarter in the prior year.
  9. 9. Strong Results “As we expected, we achieved strong fundamental results in the second quarter, driven by a lower volume decline, strong pricing and robust market share.” -- CEO André Calantzopoulos Source: Philip Morris
  10. 10. Dividends and Buybacks ➢ Philip Morris pays an attractive dividend yield of 4.4%. ➢ The dividend payout ratio is near 72% of average earnings estimates for 2014. Dividend growth should probably be in line with earnings growth in the years ahead, since there is not much room to aggressively increase the payout ratio. ➢ Philip Morris repurchased 11.6 million shares of common stock for $1 billion during the quarter.
  11. 11. Consistent Capital Distributions
  12. 12. The Risks ➢ Tobacco consumption is declining all over the world, and there is no reason to expect a turnaround in the medium term. This is a major risk that investors should not overlook. ➢ Pricing and market share gains can only temporarily compensate for falling sales volumes across the industry. ➢ If sales continue declining over time, this could hurt earnings and cash flow, so the sustainability of capital distributions is questionable in the long term. ➢ Legal and regulatory uncertainty can be a considerable headwind for companies in the tobacco business.
  13. 13. Foolish Takeaway ➢ Strong pricing and market share gains have produced solid results for Philip Morris in the second quarter. But it’s hard to tell how long the company can sustain performance. ➢ If volume continues declining across the industry, price increases and market share gains will probably not be enough to sustain sales. ➢ Sooner or later, falling sales volumes should hurt earnings and cash flow. ➢ It was a good quarter for Philip Morris, but investment decisions should be based on the future, not past performance. Unless there is any material change in the long-term outlook for the tobacco industry, the future could be toxic for investors in the business.
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