Emerging Market Turmoil Will Hurt Philip Morris International; Time to Look Elsewhere?

Philip Morris' income will be hit by the sliding value of emerging currencies, so perhaps investors should look to Altria for a more stable outlook.

Mar 12, 2014 at 5:30PM

Emerging market currencies are on the slide around the world as political and economic stability worries investors. Unfortunately, this is really bad news for Philip Morris International (NYSE:PM), as some of the company's most promising growth markets are located within developing economies.

Currency impacts will hit growth
Phillip Morris is no stranger to the impact of currency on its earnings as the company has to convert all of its earnings back to US dollars. The company reported a $0.34 per share currency impact for the year of 2013, which effectively erased most of its earnings growth for the year. Diluted earnings per share were $5.26, up by $0.09 or 1.7% year-over-year. Excluding the currency impact, diluted earnings per share were up $0.43 or 7.3% year-over-year.

It appears that things are only going to get worse for Philip Morris over the next year, thanks in part to the declining value of currencies in several of the company's key growth markets such as Russia and Turkey. In particular, Philip Morris' management is guiding for a $0.71 per share currency impact on earnings per share for 2014. Most of this weakness is predicted to come from emerging markets which will account for $0.45 per share of weakness, up from $0.16 during 2013. Meanwhile, the weak yen will impact earnings by $0.20 per share and other currencies will impact earnings by $0.06, up 200% from the $0.02 impact for 2013. These figures were put together before the recent Russian crisis, so the final currency impact on full-year 2014 results is likely to be worse than the figures above.

To some extent, these foreign exchange impacts remove a large part of Philip Morris' traditionally defensive nature. It's all very well to say that earnings increased when excluding the impact of foreign currency. However in reality, as Philip Morris' debt and dividends are both accounted for in dollars, less income means more pressure on these payouts.

So, for investors who are looking for a company with the defensive nature of tobacco without exposure to volatile emerging markets and their currencies, Altria could be the better choice.

The better choice
Altria is a tobacco company just like former partner Philip Morris but with one key difference; Altria (NYSE:MO) has a holding in SABMiller (NASDAQOTH:SBMRY), which is a game-changer.

Altria owns Philip Morris USA and holds a near 30% stake in global brewing giant SABMiller. Due to accounting principles and going by current earnings figures, you can purchase this stake for only 6.5 times the company's trailing earnings if you invest in Altria. I have explained this in full here.

Altria's SABMiller investment nets the company around $1 billion per year, but as SABMiller is based out of London Altria's earnings from this investment are somewhat exposed to foreign exchange movements. However, the British economy and currency are much more stable than the emerging markets where Philip Morris has exposure.

What's more, Altria is more diversified than many of its tobacco sector peers. Indeed, during 2013 Altria's revenue came to a total of $24.6 billion before excise taxes. Of that, $22 billion, or 90%, came from "smokeable" products and $2 billion came from smokeless products for around 8% of revenue. Meanwhile, wine contributed $600 million, or 2% of revenue. The income from SAB went straight to Altria's bottom line.

Altria looks attractive from a financial-metric standpoint as well. The most important of these metrics is the company's impressive dividend history. According to DividendChannel.com, an investment in the company during the past 10 years would have returned just less than 20% annually if the dividends were reinvested; this is a return you'd be hard-pressed to find anywhere else. At present, the company offers a 5.2% yield.

Foolish summary
To sum it up, emerging market turmoil is going to hit Philip Morris' earnings hard during 2014 and this will put the brakes on the company's growth. For investors who are looking for a more stable investment with a positive outlook and a diversified product offering, perhaps Altria could be a better choice.

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Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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