Are Philip Morris Earnings Topping Out?

Philip Morris International (NYSE: PM  ) will release its quarterly report on Thursday, and investors have been bracing for continued declines in sales that are threatening to bring earnings growth to a standstill in the future. The biggest concern for Philip Morris shareholders is that the company is losing its advantage over U.S. tobacco giants Altria Group (NYSE: MO  ) and Lorillard (NYSE: LO  ) , as more stringent regulation overseas begins to produce the same headwinds that American tobacco companies have struggled against for decades.

When Philip Morris was first spun off from Altria, many investors argued that the international giant would have much better prospects, because of the perception that foreign markets would be much more benign to cigarette sales growth. Unfortunately, current trends suggest otherwise, as an increasing number of foreign governments consider tobacco regulation in the same vein that the U.S. has imposed for years. Can Philip Morris have as much success dealing with regulatory hurdles as its U.S. counterparts have had over the years? Let's take an early look at what's been happening with Philip Morris International over the past quarter and what we're likely to see in its report.


Source: Wikimedia Commons, courtesy Takeaway.

Stats on Philip Morris International

Analyst EPS Estimate

$1.37

Change From Year-Ago EPS

10.5%

Revenue Estimate

$7.79 billion

Change From Year-Ago Revenue

(1.3%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will Philip Morris earnings growth come to a halt?
In recent months, analysts have had mixed views on Philip Morris earnings. They've raised their fourth-quarter estimates by a penny per share, but they've dramatically cut their full-year 2014 projections by almost $0.50 per share. The stock has responded badly, falling 13% since late October.

The third-quarter earnings report from Philip Morris highlighted some of the mixed results the cigarette company has had lately. A 4.3% gain in adjusted earnings showed the company's ability to overcome falling shipment volumes, even as a strong dollar weighed on sales and held revenue growth to just 0.1%. But on a more negative note, Philip Morris cut its guidance for the full 2013 year, citing concerns about some of its international markets despite gaining market share in several key areas around the world.

But what sent shares tumbling was Philip Morris' announcement in November that it expected 2014 to be a particularly challenging year. Specifically, Philip Morris believes that earnings will grow at just a 6% to 8% pace in 2014, well below its longer-term target of 10% to 12%. Wall Street analysts weren't happy with the move, as Goldman Sachs took Philip Morris off its conviction buy list. By contrast, Altria, Lorillard, and Reynolds American (NYSE: RAI  ) have seen reasonably solid results in the U.S., with Lorillard actually posting double-digit percentage growth in earnings.

The key for growth at Philip Morris is to tap into emerging markets to a greater extent. Right now, the company has a huge amount of exposure to Western Europe, where the regulatory environment is quickly becoming similar to what U.S. tobacco companies are used to seeing domestically and where taxes are even higher than U.S. cigarette taxes. By contrast, many emerging markets have very low tax rates and less regulation on sales practices. That disparity probably won't last forever, but it provides a window of opportunity for Philip Morris to capitalize on -- at least as long as emerging market economies remain strong.

In addition, cigarette alternatives could play a major role in Philip Morris' growth. Electronic cigarettes have become extremely popular, and Philip Morris' partnership with Altria to develop e-cigarette technology could help it fight potential competition from Lorillard and Reynolds. That said, with e-cigarette regulation on uncertain footing right now, that growth opportunity could go away if regulators clamp down.

In the Philip Morris earnings report, watch to see how the company deals with the recent emerging market crisis. Signs of weakness in a high-growth area could be yet another problem for the cigarette giant to overcome in the short run.

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