Is Philip Morris Lost in Translation?

When Philip Morris International (NYSE:PM) last appeared on stage, the quarterly story centered around unfavorable currency exchange rates and volume declines across Europe, Africa, and the Middle East. Three months later, and it's pretty much the same song and dance for the company's third-quarter earnings.

This time, though, volume is actually down by 2.9% instead of break-even, as it was for the previous period. And that number includes acquisitions; otherwise, volume would have been down by 4%. Sales of flagship brand Marlboro fell by 4.3%, driven by price pressures thanks to increasing excise taxes in many European markets, which isn't great news for the premium tobacco product.

But Philip Morris International did increase its full-year earnings forecast, so it's not like the company isn't making money, just not as much as it did in 2008. Revenue declined by 5.3% on the quarter -- PMI projects that revenue would have increased by 6.9% without currency fluctuations -- and operating income dropped by 1.4%. But the company deployed massive cash ($1.5 billion) in buying back 31.5 million shares in the third quarter.

Hey, it's tough all around for the tobacco companies, with Altria (NYSE:MO) among those delivering volume and revenue declines. Reynolds American (NYSE:RAI) today reported an 11% decline in third-quarter cigarette volume, which isn't so bad compared with Altria's volume drop of 16.4%. Key rival British American Tobacco (NYSE:BTI) will provide an earnings update next week, so we'll see how the competition fares in this challenging environment.

Cigarettes are sometimes considered an inelastic product, which means that people will buy them regardless of the cost and economic conditions. But with increasing global excise taxes and an unpredictable economy, it sure looks like demand can and will be hit by external factors. Whether this less-than-auspicious trend is merely temporary remains to be seen.

Philip Morris International can cut costs to save face, but I've got to wonder how it and other tobacco companies, such as Altria, Lorillard (NYSE:LO), and Vector Group (NYSE:VGR), would cope with any ongoing volume declines. At a price-to-earnings ratio of 15.1 and close to its 52-week high, Philip Morris International looks more like a hold than a buy, until this former bellwether steadies itself in its new global marketplace. The company's recently increased dividend should make the wait a bit more enjoyable, though.

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