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The Only Reason Philip Morris International Boosted Its 2017 Guidance

By Dan Caplinger – Updated Feb 24, 2017 at 2:07PM

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Don't read too much into this move.

Investors in Philip Morris International (PM -1.73%) have had to deal with considerable turbulence in the global tobacco giant's financial results in recent years. Even though many markets around the world have fewer regulations and other impediments to tobacco sales than the U.S. does, Philip Morris has still faced increasing levels of scrutiny among health officials and lawmakers in some of its most important jurisdictions. Philip Morris' hardships made this week's announcement boosting the tobacco giant's 2017 earnings guidance good for shareholders to hear, but there was only one real reason for the move, and all it shows is that Philip Morris appears to have resolved just one of the issues it has faced recently.

What Philip Morris International said -- and why

On Feb. 22, Philip Morris International made a change to what it believes it will be able to earn during 2017. The tobacco giant said earnings should come in between $4.80 and $4.95 per share, compared to the $4.48 per share in earnings it posted in 2016. That was better than the guidance Philip Morris had given just a couple of weeks earlier, when it announced its fourth-quarter results, representing an increase of $0.10 per share at both ends of the range.

However, Philip Morris said fundamental business performance had nothing to do with the decision to increase its guidance. Instead, the tobacco giant attributed the shift upward solely to its new forecast for negative currency impacts from its international business. In particular, Philip Morris said it now believes it will suffer only an $0.08 per share reduction in earnings as a result of strength in the U.S. dollar compared to the foreign currencies in which it earns most of its revenue and profit. That's down from its previous expectation for an $0.18 per share currency headwind. The company still expects currency-neutral earnings growth of 9% to 12% for the year, excluding the newly reduced currency impact figure.

Bundles of cash.

Less dollar strength explained the Philip Morris announcement. Image source: Getty Images.

Why Philip Morris' announcement is still good news

Most investors would prefer to see better earnings expectations for Philip Morris International stem from more favorable business prospects going forward. Yet it's hard to underemphasize the role currency problems have played in holding back Philip Morris from posting earnings growth in recent years. During the last two quarters of 2014, the tobacco giant reported $0.48 per share of earnings headwinds related to the strong dollar. Those impacts only accelerated during 2015, with three straight quarters of suffering at least $0.30 per share in negative currency impacts on the way to a full-year hit of $1.19 per share.

Philip Morris started to get some relief in 2016, when the dollar's ascent finally took a pause. Despite an $0.18 per share currency impact in the first quarter last year, Philip Morris ended the year with just $0.46 per share of downward pressure from foreign exchange. Nevertheless, even that amount cost the company about 10% of its bottom line, and it played a vital role in preventing the international tobacco giant from producing the earnings growth investors had taken for granted in prior years.

What's ahead for Philip Morris?

In some ways, Philip Morris International's latest guidance comes as somewhat of a surprise. Some foreign exchange specialists see a lot of potential for the U.S. dollar to regain its strength during 2017, with expectations that the Federal Reserve will raise short-term interest rates in the U.S. even as most other major currencies deal with rock-bottom interest rates and continued monetary-policy accommodation. Yet although Philip Morris' forecast doesn't discount the possibility of some dollar strength, it nevertheless thinks the pace of its strengthening will slow to a crawl over the course of the year. That's certainly possible, but if the U.S. economy picks up steam as rapidly as some believe it will, then the prediction might prove overly optimistic for Philip Morris.

Philip Morris stock climbed 2% after the company gave its new guidance, but what's far more important is whether the tobacco giant can continue to see fundamental strength both in the cigarette market and in its efforts to sell reduced-risk alternatives to traditional cigarettes. If it can, then currency impacts will eventually wash out and give Philip Morris investors the growth they've wanted to see for a while.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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