Philip Morris International Earnings Preview: What to Watch

Philip Morris International (NYSE: PM  ) reports fourth-quarter earnings on Thursday, Feb. 6, to wrap up what has been a challenging year for the company. Adverse currency impacts, higher excise taxes, and declining cigarette volumes were the primary culprits in Philip Morris' miserable year. The stock now trades where it did two years ago, although it has paid dividends since then. Investors want to see evidence of change as the company heads into 2014.

What to expect
If Philip Morris' results are anything like Altria's were last week, the market will not be pleased. Altria's shares slid 2% after it announced lower shipment volume and worse-than-expected earnings. Altria's shipments of Marlboro products declined 5.7% in the fourth quarter despite an increase in volume in the third quarter. On the other hand, Philip Morris' volume declined 5.7% in Q3 and it is down 5.3% through the first three quarters of 2013.

Although Philip Morris and Altria operate in different geographies, the fact that Marlboro volume would increase in the U.S. and decline elsewhere indicates the difficulty of the international operating environment, particularly in the European Union. High excise taxes -- in some instances exceeding 70% of the price of cigarettes -- are levied by European Union member nations as their primary tools to discourage cigarette consumption. The combination of high cigarette taxes and weak economic conditions has made the region a difficult one for Philip Morris.

Taking into account Altria's poor fourth-quarter results and the difficult international operating environment, Philip Morris' fourth quarter is not likely to be a good one. However, investors should watch for three things in the earnings release that may shed light on the company's prospects over the next couple of years.

Currency impacts
Philip Morris has been plagued in recent years by a strong dollar. Through the first three quarters of 2013, Philip Morris' earnings were 5.4% lower due to currency headwinds. The euro and the yen have had the biggest impact on the company's results. The European Union represents 27.5% of revenue and 31% of operating profit for Philip Morris, while Asia represents about 35% of revenue and operating profit for the company.

In November, management raised its 2013 earnings per share guidance by $0.02 as a result of better exchange rates. Since the announcement, the euro has strengthened somewhat while the yen has weakened against the dollar. These conflicting effects may cancel out, placing Philip Morris' fiscal 2013 earnings in management's updated range of $5.37 to $5.42 per share. The consensus earnings estimate is $5.40 per share.

Share repurchases
Philip Morris has spent $32.5 billion to repurchase 539 million shares since May 2008 -- that's more than 25% of its shares outstanding after the spinoff from Altria. After spending $4.5 billion to repurchase 50 million shares in the third quarter, the company has about $10.6 billion left under its current stock repurchase program. Investors who own the stock or are considering buying shares presumably believe that the stock is cheap, so the more stock Philip Morris repurchases, the better.

In addition to the company's share repurchase program, several insiders are buying shares themselves. Board member Graham Mackay bought more than $11 million worth of stock in August at prices in the high $80s per share. Chairman Louis Camilleri sold 60,000 shares in December, but the transaction represents only a small portion of his 1.4 million-share stake. Investors should be encouraged that insiders are showing confidence in the company.

Reduced-risk products
Declining cigarette volume is inevitable; Philip Morris' only way out of a long-term secular decline in revenue is to bring new products to market. Investors should keep an eye out for comments about ongoing trials for Platform 1, the company's new heat-not-burn product due out in late 2015. Early trials exceeded management's expectations; any further indications of the success of the product would go a long way toward bolstering investors' confidence in the stock.

Bottom line
In all likelihood, the fourth quarter was not a good quarter for Philip Morris. Declining cigarette volume, negative currency impacts, and weak economic conditions make it difficult for Philip Morris to deliver consistent value increases each quarter. However, a weakening dollar, continued share repurchases, and the rollout of new product innovations could reverse Philip Morris' fortunes in the years ahead. Keep an eye out for these factors when the company releases fourth-quarter results.

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