Cigarette Volume Down, but Philip Morris Is Still Smokin'

The pure play on the still-strong international tobacco market, Philip Morris International (NYSE: PM  ) reported higher earnings last week and a wealth of data suggesting that smoking shows little sign of fading in regions outside of the United States and some European countries. Asia, in particular, is a smoker's paradise and continues to provide Philip Morris International a source of growth alongside other emerging markets. But after years of attractive growth coupled with a healthy dividend, Philip Morris now faces the challenge of continuing its impressive run. With a recent cut in earnings guidance, is the international cigarette giant headed for rougher times ahead?

Recap
For the third quarter, Philip Morris was able to deliver some impressive bottom-line figures, despite weak top-line growth. The company saw its reported diluted earnings per share grow by more than 9% to $1.44, up from $1.32 in the year-ago quarter. With currency issues taken out of the equation, earnings grew an even fatter 15.1% to $1.53 per share.

The gains came despite a relatively substantial decrease in cigarette shipment volumes -- down 5.7% to 223.1 billion units. Net revenues barely climbed, up just 0.1% for the quarter. Outside of the currency issue and excise taxes, adjusted net revenue gained 1.6%.

Looking ahead, Philip Morris faces a couple of issues that have forced management to revise guidance downward. For one, the company will take a $0.01 per-share tax charge related to the American Taxpayer Relief Act of 2012, and an additional $0.03 per share in restructuring fees. However, the bearishness is not purely a result of one-time events, as management did acknowledge concern for sales weakness in various markets. Still, the company has again bumped up its dividend by more than 10%.

Investors should take away the following from this quarter: Tax-paid cigarette sales volumes are, as predicted, showing some decline in various markets. However, the company's brands are able to price in such a way that cash flow and earnings remain impressive, and likely will for the foreseeable future. Basically, the company has levers to pull as top-line sales face challenges.

Fading out?
The big-picture question here is whether cigarettes will one day be a vice enjoyed by only a health-irreverent few. Obviously, in more developed nations such as the U.S., Canada, and much of Europe, cigarette consumption has already experienced vast declines from its heyday.

One can assume over the ultra-long-term that worldwide smoking rates will eventually decline as more global citizens are increasingly educated on the risks involved. However, this does not spell imminent death for Philip Morris (or any other tobacco player, for that matter). The key to Philip Morris' success going forward is emerging market share -- something it has plenty of. Even in the European Union, where smoking is trending down fast (from 40% to 28% in the last few years, according to the European Parliament), management is encouraged by favorable market share trends. In Asia, smoking rates are actually rising.

With the company trading at under 15 times earnings and with still-fantastic cash flow, the income-seeking investor should not shy away from Philip Morris International.

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