Altria Group Vs. Philip Morris International: Quarterly Earnings Showdown Points to 1 Winner

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.

Foolish summary
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.

Looking for more yield?
The smartest investors know that dividend stocks like Philip Morris and Altria simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2014, at 9:41 AM, dbtuner wrote:

    plus Altria makes it's last quarterly FETRA payment of $100M/qtr at the end of Q3. This will increase cash flow 10%

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2938306, ~/Articles/ArticleHandler.aspx, 9/3/2015 7:19:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

Today's Market

updated 10 hours ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:01 PM
MO $53.13 Up +1.10 +2.11%
Altria Group, Inc. CAPS Rating: ****
PM $78.70 Up +0.92 +1.18%
Philip Morris Inte… CAPS Rating: ****