With both Altria (NYSE: MO ) and Philip Morris International (NYSE:PMI) having released their quarterly results recently, investors should now take a step back to assess which company is better positioned for building lasting value for shareholders. Hint: Altria is still the king of the tobacco industry.
Taking a closer look
Before we discuss why Altria still wears the crown, let's go over the recent results. The company reported that first-quarter adjusted diluted EPS, which excludes the impact of special items, increased 5.6% to $0.57. However, including special items, EPS slumped 14.5%, although comparisons were affected by special items, including tobacco litigation settlements. Still, headline figures are all well and good, but they don't give an in-depth view of the company's operations. So, let's dissect the results to try and figure out what's really going on.
Altria's main income stream continues to be cigarettes and other smokeable products. Smokeable revenues ticked lower by 0.2% year over year as the company shipped 2.5% fewer smokeable products than it did in the same period the year before.
Due to a decrease in excise taxes paid by Altria, the company's smokeable revenues net of excise taxes increased by 1.2% and adjusted smokeable operating income jumped higher by 6.4%. Operating margins on smokeable products rose to 44.1% at the end of the first quarter up from 41.9% during the first quarter of 2013.
Cigarettes and other smokeable products are not Altria's only source of income. The company also sells smokeless tobacco products. Altria's smokeless division reported a year-over-year sales jump of 6.4%, a 1.1% rise in operating margins and a 7.7% jump in operating income.
What's more, Altria's other smokeless division, Ste. Michelle wine, reported a year-over-year rise in sales of 2.4% and a 10% jump in operating profit. The volume of wine shipped increased 1.1% year over year.
Not just rising sales
Aside from the robust sales figures above, there's another interesting set of figures within Altria's Q1 results. Last year, Altria's management took the vastly understated action to refinance some of the company's debt.
The company tendered to repurchase $2.1 billion of debt, which paid out a fixed rate of interest of between 9.25% and 10.2%. Obviously, paying a rate of interest that high in this low interest rate environment would be madness; 10% interest on $2 billion is around $200 million in annual interest payments.
To fund this tender offer, Altria issued $1.4 billion of 10-year notes with a 4% coupon and $1.8 billion of 30-year notes with a 5.375% coupon. At the time of this issue, I speculated that Altria's replacement debt issue of $3.2 billion, which offers an average interest rate of 5%, should only cost the company $160 million in interest per year. Based on this back-of-the-envelope math, I estimated that this move would add 1% to Altria's annual net income.
It would seem as if this refinancing has worked, as Altria reported interest expenses of only $153 million during the first quarter, down from $261 million reported during the same period in 2013.
The final take away from Altria's results was management's earnings guidance for 2014. Guidance was raised to $2.53 to $2.60 per share from guidance of $2.52 to $2.59 per share given at the end of 2013, representing a growth rate of 6% to 9% from an adjusted diluted EPS base of $2.38 in 2013.
Unfortunately, while Altria reported a strong quarter within the U.S., overseas, Altria's international peer, Philip Morris International had a tough quarter.
Philip Morris' earnings per share for the quarter slumped 7.8% as the volume of cigarettes shipped by the company declined 4.4%. Still, Philip Morris reported that Marlboro shipments to Asia by units jumped 0.8%, led by Indonesia and the Philippines; however, the adverse timing of shipments in Japan and a lower market share in Pakistan had offsetting effects.
Sales data aside, the things that interest me the most about Philip Morris' most recent set of earnings are the company's outlook and operating margin. Worryingly, Philip Morris' operating margin for 2013 actually declined from 17.8% in 2012 to 16.9%. In part, this margin compression resulted from higher excise taxes across the board, and for some reason, Philip Morris failed to mitigate these increases through price hikes. Sadly, this trend has continued into 2014.
For the quarter, Philip Morris' operating income slumped 13%, even though its revenue only declined 8.8%. In addition, excise taxes as a percentage of revenue ticked up to 61% from 59% in the same period of 2013.
So, expanding margins, falling excise taxes, and rising smokeless revenues all contributed to Altria's earnings growth during the first quarter, and it looks as if this trend is set to continue for Altria. On the other hand, Philip Morris continues to be buffeted by multiple headwinds, which makes Altria the better investment compared to its larger, international peer Philip Morris.
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