Companies always strive to take steps to boost their revenue and net income, and when faced with obstacles that hold them back, they only fight harder to eke out gains. Operationally, Philip Morris International (PM -0.79%) has done an excellent job of bolstering its business, overcoming regulatory threats and finding ways to use its pricing power to offset downward pressure on other fronts. Yet the best thing to happen to Philip Morris in 2016 is something that's entirely out of its control: the turnaround in the strength of the U.S. dollar. Now that foreign currency impacts have begun to lessen in intensity, Philip Morris hopes that more of its fundamental success will show up in its financials going forward.

The strength of the U.S. dollar has been a thorn in Philip Morris International's side. Image source: Getty Images.

The huge impact of foreign currency on Philip Morris

Philip Morris International is in the extremely unusual position of being a U.S. company that serves foreign markets exclusively. As part of its spinoff from parent Altria, Philip Morris International inherited the international operations of the tobacco giant. Many investors saw Philip Morris as the more attractive play on global tobacco because of the tough U.S. regulatory environment and the rising consumer class in many faster-growing areas of the world.

However, serving foreign markets forces Philip Morris to deal in the currencies of the countries where its customers live, and that has created huge downward pressure on revenue and earnings over the past couple of years. Put simply, when the U.S. dollar is strong, then the foreign currency that Philip Morris brings in through sales and what it earns in profits is worth a smaller number of dollars, and that translates into subdued growth or even contraction in top- and bottom-line figures for the tobacco giant. Take a look at the table below to get a sense of just how much the dollar's strength has cost Philip Morris.


Currency Impact on Revenue

Currency Impact on Earnings Per Share

2014 Q3

$394 million


2014 Q4

$681 million


2015 Q1

$939 million


2015 Q2

$1.3 billion


2015 Q3

$1.4 billion


2015 Q4

$1.1 billion


2016 Q1

$691 million


2016 Q2

$303 million


Data source: Company filings.

As you can see, the hits that Philip Morris took in 2014 and 2015 were especially painful for the company. For the full 2015 year, the $1.20 per share in lost earnings cost the company more than 20% of its bottom line, and that turned what would have been a 12% gain in adjusted earnings per share into a 12% decline. Similarly, in terms of reported revenues, Philip Morris suffered a 10% drop in 2015 compared to 2014's figures. But when you take out the impact of adverse currency movements, sales would have climbed by nearly 6% on a year-over-year basis.

Will things keep getting better for Philip Morris?

Investors have known for a long time that the dollar's strength wouldn't last forever, and the recent slowdown in its appreciation against major foreign currencies has finally started to show up in Philip Morris' numbers. In its most recent quarterly report, the impact of the strong dollar fell by more than half sequentially compared to the first quarter of 2016, and Philip Morris responded by boosting its guidance for the full year.

That said, Philip Morris isn't entirely out of the woods. It still believes that 2016 will see a $0.40 per share hit to earnings because of the dollar's strength, and revenue will also remain artificially depressed for some time. Still, those numbers are a lot better than what it has suffered in past periods.

The biggest threat to Philip Morris' currency turnaround comes from global central banks and their impact on macroeconomic policy. Recently, the Federal Reserve has hinted that it wants to raise U.S. interest rates, which is in contrast to most other major economies across the globe. Rising rates could bolster interest in the dollar, creating another leg up that could bring new currency pressures to Philip Morris. So far, the Fed has held itself back from making rate increases, but investors are more uncertain than ever right now about its immediate future course of action.

For Philip Morris, a strong dollar is bad news, and the best win for the company this year has been seeing signs of an end to the long trend against it. Dollar weakening is far from a sure thing right now, but even the possibility of a pause in the U.S. currency's strength could bring benefits to Philip Morris shareholders.