Phillip Morris Just Misses - Analyst Blog

Cigarette manufacturer and marketer Philip Morris International Inc. (PM) reported marginally weaker-than-expected third-quarter results, adversely affected by inventory payback in Japan, coupled with significant excise tax increases in Greece and Turkey. Earnings per share, excluding special items, came in at $1.00, a penny below the Zacks Consensus Estimate.

However, compared to the prior-year period, Philip Morris' earnings per share were up 7.5% (from 93 cents to $1.00), attributable to price increase and strong volume growth in Asia.

Shares of Philip Morris have lost more than 1.5% in early-market trading on the New York Stock Exchange.

Revenue, Volumes & Margins

During the quarter, Philip Morris' net revenues recorded a growth of 0.4% year-over-year to $6.6 billion, but missed the Zacks Consensus Estimate of $7.0 billion. The growth over the third quarter of 2009 was mainly driven by favorable pricing across all business segments/acquisitions, partly offset by unfavorable currency translations and volume mix. Excluding the impact of currency and acquisitions, organic revenues posted a decline of 0.2%, reflecting the payback of distributor inventory in Japan.

Cigarette shipment volume in the quarter grew by 4.5% year-over-year to 229.2 billion units, primarily driven by an impressive 28.8% growth in Asia as Philip Morris recorded strong gains in Indonesia, Korea, Pakistan, and Philippines. However, volume in EEMA (Eastern Europe, Middle East & Africa) decreased 3.3%, pulled down by Turkey and Ukraine.

In the European Union, cigarette shipment volume dropped 4.6% from the third quarter of 2009, predominantly due to lower total markets, while Latin America & Canada fell by a modest 1.7%, mainly on the back of unfavorable trade inventory movements in Colombia. Excluding acquisitions, Philip Morris' organic cigarette shipment volume witnessed a decline of 2.9%.

During the quarter, shipments of Marlboro declined 1.2% as a result of the lackluster EU market (mainly in Germany, Greece, and Italy). Shipments of L&M were down 2% in the quarter due to weak performance in Russia. Chesterfield, Parliament, and Lark brands recorded decline rates of 1.4%, 5.0%, and 10.2% but Bond Street managed to buck the trend with a 2.5% increase.

Philip Morris' quarterly gross profit rose 1.3% year-over-year to $4.3 billion, while gross margin was slightly down at 25.5%. Operating income witnessed a fall of 0.5% to $2.8 billion, while operating margin decreased 50 basis points to 16.7% on the back of unfavorable volume mix, timing of costs, and the adverse impact of the asset impairments and exit costs.

Financial Analysis

As of September 30, 2010, Philip Morris had cash on hand of $3.5 billion and long-term debt (including current portion) of $15.0 billion, representing a debt-to-capitalization ratio of 75.3%. During the third quarter, the company generated $2.4 billion of cash from operations and deployed $164 million towards capital expenditure leading to a free cash flow of $2.3 billion.

Dividends & Share Buyback

Recently, Philip Morris announced a 10.3% increase in its quarterly dividend to 64 cents per share ($2.56 per share annualized). During the quarter, the company repurchased 20.7 million shares for $1.1 billion.

Guidance

Concurrent with the earnings release, management raised and narrowed its guidance for 2010. Annual earnings are now expected to be in the range of $3.90 to $3.95 per diluted share versus previous guidance of $3.75 to $3.85. Improved guidance (up by 20 – 22% compared to $3.24 in 2009) has been driven by favorable exchange rates, better business performance, and a lower tax rate. Excluding currency, diluted earnings per share are expected to increase by approximately 16% to 18%.

The guidance is above the Zacks Consensus Estimate of $3.80 per share, which moved up 2 cents over the past month as 4 of 13 covering analysts raised expectations, as against no movement in the opposite direction.

Philip Morris currently has a Zacks #2 Rank (short-term Buy rating).