Please ensure Javascript is enabled for purposes of website accessibility

Philip Morris International Expects a Tough 2016 Ahead

By Dan Caplinger - Feb 4, 2016 at 2:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The tobacco giant took big hits on the top and bottom lines and sees more pain in its guidance.

Image source: Philip Morris.

International tobacco company Philip Morris International (PM -0.26%) has been an attractive stock ever since it split off from domestic peer and former parent Altria Group (MO 0.00%), combining growth prospects from foreign markets with solid dividend income. But 2015 has been a tough year for Philip Morris, and between foreign currency weakness and new regulatory threats that, in some cases, are even worse than what Altria has had to face in the U.S., the global tobacco giant has seen its financials under pressure. Coming into Philip Morris International's fourth-quarter financial report Thursday, investors were prepared for declining fundamentals, but worse-than-expected results and gloomy guidance went beyond those initial expectations.

Let's take a closer look at Philip Morris International's latest results and what it sees ahead.

The never-ending fight of Philip Morris vs. the U.S. dollar
Philip Morris International's fourth-quarter results looked as ugly as some past quarters have. Sales dropped 11% net of excise taxes to $6.39 billion, which was slightly worse than the 10% fall most investors were expecting to see. Net income of $1.25 billion was off 22.5% from the year-ago quarter, and adjusted earnings of $0.81 per share exactly met the consensus forecast among investors.

Currency impacts continued to hit Philip Morris hard. The strong dollar cost the company $1.1 billion in revenue, which would have resulted in a 4% growth rate in currency-neutral terms. The hit to earnings was $0.18 per share, but as big as that is, it's only half the amount Philip Morris saw last quarter.

Looking more closely at Philip Morris' numbers, cigarette shipments dropped 2.4% to 209.8 billion. All four of the company's geographical segments suffered large declines in operating income, and only the Latin America and Canada segment managed to produce growth, even after taking currency impacts into account. Revenue jumped across the board in local-currency terms, but the dollar's impact pulled all four regions down, and the Eastern Europe and Middle East segment posted the worst numbers with a 19% drop in dollar-denominated sales. Favorable pricing trends helped offset currency pressures and unfavorable shifts in demand among various products.

CEO Andre Calantzopoulos pointed to Philip Morris International's successes. "Against a backdrop of improving industry volume trends in many key geographies," Calantzopoulos said, "our cigarette brand portfolio performed superbly, driven by solid market share gains underpinned by the successful rollout of the Marlboro 2.0 architecture." The CEO also pointed to reduced-risk products as a continuing source of potential for Philip Morris, with the company's collaboration with Altria likely to produce dividends down the road for both tobacco giants.

Why Philip Morris International is nervous about 2016
Calantzopoulos sees the coming year as a big opportunity. "We enter 2016 with enhanced business fundamentals and ongoing strategic initiatives that will strengthen them further," the CEO said. Despite ongoing dollar strength, Philip Morris International hopes to keep growing.

Philip Morris' guidance, however, raises some concerns about its immediate future. The tobacco company expects volume declines of 2% to 2.5%, and earnings guidance for $4.25 to $4.35 per share in earnings would be a disappointing decline compared to already-depressed 2015 levels. Philip Morris estimates that currency factors will cost it $0.60 per share in earnings, and if you adjust for those effects, the company's guidance implies a 10% to 12% growth rate in per-share adjusted net income figures.

Overall, investors in Philip Morris weren't happy with the company's uncertainty, sending the stock down by nearly 1.5% at midday following the announcement. Until the company can demonstrate its ability to grow earnings in the same way Altria has continued to do so, then Philip Morris International is at risk of further weakness in 2016 and beyond.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$43.19 (0.00%) $0.00
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$102.44 (-0.26%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.