Why This Philip Morris Earnings Report Is Crucial

Philip Morris International (NYSE: PM  ) will release its quarterly report on Thursday, and projections suggest that it will manage to deliver decent results for investors. But shareholders don't seem convinced about Philip Morris earnings, as they've recently sent the stock down substantially from its May highs.

Many investors have gravitated to Philip Morris in the belief that by doing all of its business overseas, it won't ever have to worry about cigarette warnings and other regulatory measures that its U.S. peers face. But increasingly, it's becoming evident that other countries are looking for ways to control tobacco in the same way the U.S. does. Let's take an early look at what's been happening with Philip Morris over the past quarter and what we're likely to see in its quarterly report.

Stats on Philip Morris

Analyst EPS Estimate

$1.41

Change From Year-Ago EPS

3.7%

Revenue Estimate

$8.19 billion

Change From Year-Ago Revenue

0.9%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will Philip Morris earnings go up in smoke this quarter?
Analysts have cut back on their earnings calls about Philip Morris lately, cutting their June-quarter estimates by $0.08 per share and their full-year 2013 consensus by double that amount. The stock has also reflected that uncertainty, falling 5% since early April.

Ever since its spinoff from Altria (NYSE: MO  ) , Philip Morris has benefited from higher growth prospects from its international sales. At the same time that Altria, Lorillard, and (NYSE: LO  ) other U.S. tobacco companies have struggled to keep their revenues moving higher, the argument is that other countries with less regulation offer better environments to foster sales growth for Philip Morris. That's true to an extent, although the edge that Philip Morris has had over its peers has narrowed considerably in recent years and is slated to continue to shrink in the future.

But Philip Morris has its own challenges to face. Last quarter, the company reported considerable underground cigarette trading in areas of southeastern Asia that cut into its overall sales volumes. Moreover, although the U.K. government delayed a decision on a potential ban on putting branding images on cigarette packs, the company nevertheless faces increased regulatory threats. The U.K. said that it wanted to see the effects of a similar measure in Australia before moving forward, suggesting that if the measure proves successful, Philip Morris could see it come up in other countries around the world. The European Union also imposed a ban on menthol cigarettes recently, upping the pressure on tobacco companies generally.

The other area where Philip Morris earnings could take a hit is in currency impacts. With all of its revenue coming from overseas, Philip Morris suffers when the dollar is strong, as adverse currency exchange rates can produce a substantial hit to its bottom line. Currency impacts tend to even out over time, but not being prepared for short-term fluctuations can result in a nasty surprise for unaware investors.

When Philip Morris reports earnings, be sure to watch the status of ongoing regulatory activity around the world, especially Australia. If results are starting to get hurt due to labeling regulation, it could be just the first step toward similar regulations elsewhere -- and that could pull the stock further downward in the quarters to come.

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