2 Things You Need to Know If You Own Philip Morris International

Two key developments emerged from last week's press release. Here's what you need to have an opinion on if you're a Philip Morris shareholder.

Jul 4, 2014 at 7:00PM

Philip Morris International (NYSE:PM) returned 146% in stock price increases and dividends over the last five years. That's an average of nearly 30% per year. Clearly, investors who owned Philip Morris for any significant length of time during the last five years made out pretty well. Unfortunately, two new developments have emerged to make future returns less certain. All Philip Morris investors need to know about these two things before deciding whether to hold or sell their stock.

Persistent currency headwinds
Philip Morris' stock price ended last week nearly 7% lower than it began after the company issued a press release warning that its 2014 performance would not be as good as was previously anticipated. In the release, CEO Andre Calantzopoulos cited currency headwinds and weak economic conditions as the primary factors for lowering 2014 earnings per share guidance to $4.87 to $4.97 instead of the previously announced $5.09 to $5.19.

Currency headwinds are nothing new for Philip Morris. The company's 2013 results were negatively affected by a weak euro and Asian currencies relative to the U.S. dollar. Philip Morris derives 61% of its revenue from the European Union and Asia, making currencies in these regions important drivers of dollar-denominated profits. Unfavorable exchange rates lowered earnings by 6% in 2013, and a strengthening dollar could cause an even bigger negative impact in 2014. However, currency impacts are a normal part of Philip Morris' business, and investors should not be too concerned about the company's long-term earning power because of a few bad years of exchange rate fluctuations.

Trouble down under
The press release also cited a far more troubling development as a partial cause for the lowered guidance: heavy discounting in Australia. On the 2013 year-end conference call, Calantzopoulos noted that while Australia's plain packaging laws had no impact on smoking rates, generic packaging caused smokers to trade down to value brands. In last week's press release, Calantzopoulos warned that persistent price discounting at the low end of the Australian market could cause earnings per share to come in closer to the low end of the revised range, suggesting that generic packaging would have a material adverse effect on the company's results.

Although the jury is still out on generic packaging's effectiveness as a tool to reduce smoking rates -- and there's evidence that its effect is the opposite -- Philip Morris' premium brands could lose their pricing power if plain packaging laws spread beyond Australia. The company derives the majority of its revenue from high- and mid-priced cigarettes, so a loss of pricing power would be a significant value-destroyer for Philip Morris shareholders.

What to make of it
Currency headwinds, weak economies, and crippling regulations have conspired to reduce Philip Morris' profit outlook. If the company hits the mid-point of its new guidance -- $4.92 per share -- earnings per share will have declined 1.9% from 2013 to 2014 after adding back $0.24 per share charges related to shutting down cigarette production in the Netherlands. However, after adjusting for currency impacts, earnings per share is expected to grow 6% to 8% based on the updated guidance.

Investors need to decide for themselves which measure is most accurate in describing Philip Morris' earning power. Exchange rates are somewhat unpredictable and largely out of the hands of management, but investors who believe the U.S. dollar will strengthen as the Federal Reserve's liquidity programs are rolled back may be hesitant to ignore adverse currency fluctuations. At the same time, generic packaging laws are so far contained to Australia and New Zealand, but Ireland will soon follow. Investors who believe generic packaging will become the norm may want to dump their Philip Morris stock at 17 times 2014 earnings guidance.

On the flip side, 17 times earnings is a reasonable price for a stock growing earnings per share at 6% to 8%, making the stock appealing for investors who believe the currency headwinds and generic packaging do not represent long-term threats to Philip Morris' earning power.

Foolish takeaway
Philip Morris could be a buy or a sell depending on your views regarding a few key factors. Intelligent minds can disagree on whether the dollar will continue to strengthen and plain packaging laws will continue to spread. The most important thing is that Philip Morris investors frame the investment correctly. Decide what your views are on these key issues to develop a strong justification for holding -- or selling -- your Philip Morris stock.

Better than Philip Morris: Top dividend stocks for the next decade
The smartest investors know that dividend stocks 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.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers