Can Philip Morris End Its Earnings Slide?

Image source: Philip Morris International.

Long-time investors in Philip Morris International (PM 0.52%) know firsthand just how much the strong U.S. dollar has hurt its overall results. The tobacco giant has shown substantial growth in local-currency terms, but the weakness of most foreign currencies has turned what would have been gains on the top and bottom lines into declines. Coming into the company's third-quarter financial report on Oct. 18, Philip Morris shareholders are finally hoping that it will be able to post flat earnings results on a slight gain in sales, as the negative impact of foreign currency weakness finally starts to wane. Let's take an early look at what Philip Morris International is likely to say and what it means for investors going forward.

Stats on Philip Morris International

Data source: Yahoo! Finance.

What's ahead for Philip Morris International's earnings?

Investors have had mixed views in recent months about the prospects for Philip Morris International's earnings. They've cut their third-quarter projections by $0.05 per share, but they've increased their full-year projections for 2016 and 2017 by small amounts. The stock, meanwhile, has lost ground, falling about 4% since early July.

Philip Morris International's second-quarter results in July showed investors that the anticipated improvement in the tobacco giant's numbers has taken longer than many had hoped. The company posted a revenue decline of 8%, which was nearly twice the drop that most of those following the stock had anticipated. Net income fell an even more precipitous 15% from year-ago levels, and that produced earnings of just $0.98 per share, missing the consensus forecast by $0.13 per share. Although currency impacts did hurt Philip Morris' results, falling shipment volumes also played a factor. Nevertheless, Philip Morris had high hopes for the rest of the year, and the company increased its earnings guidance for 2016 by 3% to 4% to a new range of $4.40 to $4.50 per share.

What Philip Morris sees in the future

Since then, Philip Morris has continued to face challenging conditions. At its investor day earlier this month, Philip Morris said that it anticipates cigarette industry volume declines to return to a 2% to 2.5% pace, ending a brief period of better performance. The company expects that it can outperform the broader industry, thanks largely to the pricing power and brand strength of its Marlboro and Parliament premium brands. Yet even though conditions have improved in Europe, negative factors in markets such as Argentina, North Africa, and the Philippines show that Philip Morris will have to keep fighting potential instability from having a downward impact on its results.

Partly because of those tough conditions, Philip Morris has been conservative in its capital management. The company gave investors their ninth straight annual dividend increase in late September, but the boost was just 2% over what it had paid investors over the past year, and that disappointed those investors who had looked for a slightly larger increase. At the same time, though, Philip Morris left open the possibility of restoring stock buybacks if the dollar stops strengthening, allowing the tobacco giant to convert more of its local-currency earnings into dollar-based profits.

Finally, Philip Morris is more enthusiastic than ever about its reduced-risk portfolio of products. The company's iQOS heat-not-burn technology has taken off in markets like Japan, claiming market share of almost 3% by the end of June. To meet strong demand, Philip Morris opened a new production facility in Italy, and rollouts in up to 20 different markets by year-end could demonstrate even more of the potential that the company's HeatSticks have to revolutionize the market for alternatives to traditional cigarettes.

In the Philip Morris earnings report, investors need to see evidence that the dollar's gradual flattening will eventually bring earnings growth. For the most part, shareholders have been patient, but anything that suggests that profit gains won't come by the end of 2016 could lead to a big disappointment for Philip Morris stock.