Philip Morris Weakens on Sharp Shipment Decline, but Are Better Times Ahead?

Image source: Philip Morris.

Global tobacco giant Philip Morris International (PM 1.02%) has faced many challenges recently. Currency impacts have held back its growth, and a rise in international regulation has threatened parts of its business in key regions across the globe. Coming into its second-quarter financial report earlier this week, Philip Morris investors had once again expected small declines in revenue and net income because of those pressures. However, the impact of falling cigarette shipment volume came as more of a surprise to shareholders, and Philip Morris suffered a share-price hit after it announced results that were weaker than expected. Let's take a closer look at Philip Morris International and what its report suggests about its future.

Philip Morris deals with a new setback

Philip Morris International's second-quarter results once again failed to satisfy the company's shareholders. Revenue fell 3.1% to $6.65 billion, which was about $120 million less than most investors were expecting to see from the tobacco giant. Net income was down more than 5% to $1.79 billion, and that produced earnings of $1.15 per share. That was $0.05 per share less than the consensus forecast among those following the stock.

Taking a closer look at Philip Morris' results, the strong U.S. dollar continued to hurt the top and bottom line but to a lesser extent than in the past. The revenue hit from currency impacts was just over $300 million, down by more than half from the first quarter. The earnings hit was also cut by more than half from last quarter, amounting to just $0.08 per share. Those were enough to reverse what would have been modest gains on a currency-neutral basis, but by themselves, they don't explain all of the pressure that Philip Morris has seen.

The key surprise for Philip Morris was the drop in shipment volume. Cigarette shipments of 209.3 billion were down 4.8%, which was more than triple the pace of decline in the first quarter. The decline was especially pronounced in the Asian region, which suffered an 8% drop, but the Latin America and Canada region fared almost as badly with a decline of 6%.

More broadly, that was the worst area in the world for Philip Morris in terms of sales and profit. Revenue in Latin America and Canada fell 13.6%, and that sent operating company income down by nearly a third due largely to especially weak foreign currencies. By contrast, the European Union fared the best, showing modest gains of 5% in sales and nearly 7% in operating company income. Asia and the Eastern Europe, Middle East, and Africa segment had more mixed results.

CEO Andre Calantzopoulos tried to explain the situation. "Although our second-quarter results were generally in line with our expectations," the CEO said, "our cigarette shipment volume was particularly impacted by declines in low-margin geographies."

Can Philip Morris International bounce back?

Philip Morris remains confident that it can keep moving forward. "We remain fully on track to deliver our full-year guidance," Calantzopoulos said, "which continues to represent a currency-neutral adjusted diluted EPS growth rate of approximately 10% to 12% versus 2015."

Looking ahead, Philip Morris believes that its growth will accelerate. The company still thinks that the second half of the year will dramatically outperform the first half, and Philip Morris pointed to the fourth quarter in particular as the period toward which growth prospects will be skewed favorably.

In fact, Philip Morris raised its guidance, expecting that foreign currency impacts will be weaker than expected. The tobacco giant now expects earnings of $4.45 to $4.55 per share, up $0.05 from past guidance, and it now thinks the damage from the strong dollar will amount to just $0.40 per share.

Philip Morris highlighted the success of its iQOS heat-not-burn technology, which it has been rolling out in certain markets. The company said that the brand's HeatSticks reached national market share of 2.2% in Japan, and Philip Morris is optimistic that the reduced-risk category could be a major source of growth in the years to come.

Nevertheless, Philip Morris shareholders weren't happy about the overall volume decline, sending the stock down 3% for the day following the announcement. Even with the company thinking that better times lie ahead, until Philip Morris can demonstrate an ability to show true growth, investors will be nervous that the tobacco giant's best days might be behind it.