Is Philip Morris International's Guidance Cut Just the Beginning?

Earlier today, Philip Morris International (NYSE: PM  ) cut its earnings guidance for the 2014 year, and shareholders quickly sounded the alarm, sending the stock down almost 3% in the first hour of trading. Yet even as the international tobacco giant goes through what Philip Morris hopes will be short-term challenges on its way toward a more profitable long-term strategy, investors have to be concerned about some troubling trends in international markets that could present difficulty down the road to the maker of Marlboro cigarettes. Let's take a closer look at the Philip Morris International earnings warning and why the company expects its results to fall short of initial expectations.


Source: Wikimedia Commons, courtesy Takeaway.

What's behind the cut?
Philip Morris revised its full-year 2014 earnings-per-share forecast to reflect a new range between $4.87 and $4.97. That represents about a 5% to 8% drop from final 2013 full-year figures, and it reflects a decline of $0.22 per share from Philip Morris International's previous earnings guidance range in early May. Still, on an adjusted-earnings basis, Philip Morris expects growth to continue, with 6% to 8% gains in full-year adjusted earnings per share.

Philip Morris International has already started working at trying to make itself more efficient. The cigarette-maker has targeted $300 million in savings from measures to increase productivity and reduce costs, and stock repurchases that could approach $4 billion should help to reduce share counts and thereby increase earnings per share.

PM Total Return Price Chart

Philip Morris Total Return Price data by YCharts.

Yet Philip Morris still faces longer-term problems that have plagued the entire tobacco industry. Volume declines have become the norm, and Philip Morris believes this year's drop will come in at 2% to 3%, excluding the U.S. and China, somewhat worse than historical trends. Europe in particular looks troubling for tobacco makers, with 5% to 6% drops in cigarette volumes. When management claims that cautious optimism calls for 2015 volume declines to slow to the 1% to 2% range, it's easy to see why many investors believe the tobacco industry is a dying business in terms of growth. For its part, Philip Morris expects to buck the trend somewhat with its premium brands, but it still thinks its own volume will stay flat or fall as much as 1% in the near term.

One key question for Philip Morris going forward is whether its electronic cigarette initiative will take hold worldwide. Philip Morris has two potential sources of e-cigarette growth: its partnership with former parent Altria Group to license and distribute products from the American tobacco giant, as well as its acquisition of U.K.-based Nicocigs and its Nicolites brand of electronic cigarettes. Philip Morris believes non-tobacco products have potential for fast growth in the U.K. and elsewhere, and although the acquisition of Nicocigs isn't a huge needle-mover for Philip Morris, it nevertheless sets the tone for its broader strategy in handling the category.

Philip Morris clearly has further work to do in order to get its growth back up to levels that shareholders will be comfortable seeing. For now, though, the company appears poised to make the most of its opportunities both in tobacco and in electronic-cigarette alternatives in order to keep its earnings as high as possible. That might not result in earnings growth right away, but with some luck, it should prevent Philip Morris from having to make further guidance cuts in the future.

Leaked: This coming consumer device can change everything
Imagine the multibillion-dollar sales potential behind a product that can revolutionize the way the world shops and interacts with its favorite brands every day. Now picture one small, under-the-radar company at the epicenter of this revolution that makes this all possible. And its stock price has nearly an unlimited runway ahead for early, in-the-know investors. To be one of them and hop aboard this stock before it takes off, just click here.  


Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

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: 3009482, ~/Articles/ArticleHandler.aspx, 10/23/2014 9:21:48 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...


Advertisement