Source: Wikimedia Commons, courtesy Takeaway.

On Thursday, Philip Morris International (NYSE:PM) will release its quarterly report, and investors aren't entirely comfortable with the company's prospects looking forward. Even as the proposed merger of Lorillard (UNKNOWN:LO.DL) and Reynolds American (NYSE:RAI) focuses attention on the U.S. side of the tobacco business, regulatory threats overseas have taken some of the wind out of Philip Morris' sails, making some question whether the best days for the international tobacco giant are behind it.

Philip Morris International was originally spun off from Altria (NYSE:MO) precisely to give investors what they saw at the time as favorable exposure to overseas markets. Without onerous U.S. tobacco regulation, Philip Morris seemed to have limitless potential. Gradually, though, other companies have looked at similar regulatory efforts as those in the U.S., and that has introduced new doubts for Philip Morris investors. Let's take an early look at what's been happening with Philip Morris International over the past quarter and what we're likely to see in its report.

Stats on Philip Morris International

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$7.52 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Which way will Philip Morris earnings move?
In recent months, analysts have had generally favorable views on Philip Morris earnings, raising second-quarter estimates by a penny per share and full-year 2014 projections by almost 1%. The stock has managed to pick up some ground as well, gaining 4% since early April.

Philip Morris' first-quarter results reveal both the obstacles and the promise of the international tobacco industry. On one hand, cigarette volumes fell 4.4%, and even though roughly half of that decline came from movements of inventory, it nevertheless confirmed a troubling trend in the global tobacco industry. For the year, though, Philip Morris International stayed fairly confident, still expecting 6% to 8% growth in adjusted earnings per share for the full year.

Source: Philip Morris.

But late last month, Philip Morris warned that its earnings results wouldn't be as favorable as it had initially hoped. The tobacco giant cut its earnings-per-share forecast for the full year by about 4.5%, citing a tougher regulatory environment in which several countries are looking at tighter restrictions on tobacco sales and packaging. Moreover, a strong U.S. dollar has hurt Philip Morris International's financials, with weakness in the foreign currencies that the company accepts from customers weighing on its dollar-denominated revenue and earnings.

To try to address these problems, Philip Morris has turned to the electronic-cigarette market, with the acquisition of U.K.-based Nicocigs to help it gain a bigger market share in the growing space. Yet Lorillard nevertheless has a huge first-mover advantage in electronic cigarettes, and if the company is able to follow through on its proposed merger with Reynolds American, then the combined entity could pose an even bigger threat to Philip Morris and its efforts to build market share in the booming niche.

At this point, Philip Morris International's biggest problem might be a lack of momentum. Some dividend stocks have addressed periods of weaker results by boosting share repurchases, but Philip Morris has enough outstanding debt that moves in that direction aren't likely. Without any obvious way to goose earnings upward, Philip Morris International investors should prepare for possible stagnation, at least temporarily.

In the Philip Morris earnings report, watch to see how well the company does at limiting the damage from a strong dollar and weak trends in tobacco sales. If the electronic cigarette initiative goes well, then Philip Morris International might find a way to return to its all-time record high levels from last month.

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