December 11, 2015
(PM-NYSE) $89.55*
Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 3Q15 Earnings Update
Prev. Ed.: Aug 30, 2015; 2Q15 Earnings Update
Brokers’ Recommendations: Positive: 63.6% (7); Neutral: 36.4% (4); Negative: 0% (0) Prev.: Ed.: 7; 5; 0
Brokers’ Target Price: $89.88 ( ↑ $0.17 from last edition; 8 analysts) Brokers Avg. Expected Return: 0.37%
*Note: Although dated Dec 11, 2015, share price and broker material are as of Oct 22, 2015.
Note: The tables below (Revenues, Margins, and Earnings per Share) contain material from fewer brokers than in the
Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Philip Morris International is a leading international tobacco company that owns brands like Marlboro,
Parliament, Virginia Slims and others.
Of the 11 analysts in the Digest group covering the stock, 7 assigned positive ratings and 4 provided neutral ratings.
Positive or equivalent outlook (7/11 firms) – The bullish analysts commend Philip Morris’ strong pricing power, cost discipline, cash flow and performance in the emerging markets. These analysts also commend the company’s collaboration with Altria Group Inc. to develop and market its Next Generation
Product as it will help it to maintain market share amid declining tobacco volume. These analysts are particularly optimistic about Philip Morris’ Reduced Risk Products (RRP) which, they believe, will contribute to revenues significantly from 2017 after the national launches scheduled this year are completed.
Neutral or equivalent outlook (4/11 firms) – These firms appreciate Philip Morris’ strong portfolio of brands. However, they believe that the impact of these positive will be marred by headwinds such as unfavorable currency translations, strict government regulations and diminishing social acceptance of smoking. These firms are also concerned about the recent merger between cigarette makers Lorillard and
Reynolds as the combined entity might grab Phil ip Morris’ market share.
Dec 11, 2015
Based in New York, Philip Morris, through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products. Philip Morris is legally based in the U.S. and listed on NYSE, but
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has no operations in the country. Philip Morris was spun off from Altria Group Inc. in Mar 2008 in order to protect it from U.S. litigation.
Its international product line comprises brands like Marlboro, Merit, Parliament, Virginia Slims, L&M,
Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company operates primarily in the European Union, Eastern Europe, the Middle East, Africa, Asia, Canada, and Latin
America.
For reporting purposes, Philip Morris divides its business into the European Union (EU), Eastern Europe, the Middle East and Africa (EEMA), Asia and Latin America and Canada.
The analysts identified the following issues as critical for evaluating the investment merits of Philip Morris:
Key Positive Arguments Key Negative Arguments
Strong International Presence: Philip Morris commands a strong presence in several developing markets such as Korea, Philippines, China, Latin
America and Canada and the European region. This helps the company to maintain its sales and margins amid macroeconomic challenges in the developed economies.
Price Leadership: Tobacco pricing is more important than volume trends and Philip Morris is the market leader in this respect. The company has remained afloat amid unfavorable tax environment backed by its pricing power. It has increased prices several times without losing market share.
Evolving with Demand: Philip Morris focuses on producing less harmful nicotine products to meet the changing needs of consumers. Moreover, the company entered into a strategic agreement with Altria to combine their marketing power to ramp up the market of non-combustible tobacco products. The two companies have also signed a technology sharing deal for their e-cigarettes. The combined force is expected to help the companies maintain market share amid growing awareness against tobacco products.
Declining demand of the company: The company has been witnessing declining demand for cigarettes due to the ongoing anti-tobacco campaigns and price rise to offset rising taxes.
Regulation Risk: The FDA’s regulation of using graphic warning labels on cigarette packs is expected to dissuade smokers. Additionally, it will lead to huge printing expenses, negatively impacting the industry.
Higher taxes: Governments has imposed higher excise taxes on cigarettes, as a result of which tobacco companies are increasing their cigarette prices. Higher prices of cigarettes are leading to lower cigarette volumes.
Note: Philip Morris ’ fiscal year ends on Dec 31. For more information, please visit the company’s website www.pmi.com
.
Dec 11, 2015
A superior brand portfolio, stable market share growth, a positive pricing environment and strong productivity gains are the major strengths of the company, which will help it to stay afloat in the challenging tobacco industry.
Philip Morris commands a strong presence in several markets such as Korea, Philippines, China, Latin
America and Canada and European region.
Moreover, to boost its unconventional cigarettes, Philip Morris entered into a strategic agreement with
Altria in Jan 2014. Under the agreement, Philip Morris will market Altria’s MarkTen e-cigarettes internationally and the latter will distribute two of Philip Morr is’ heated tobacco products in the U.S. The companies have also decided to partner on a regulatory engagement related to the products. The companies will also work on gaining shares as well as improving existing versions for the products. Such
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collaboration is encouraging as it will help the companies maintain market share amid declining volume and growing awareness against tobacco products.
As part of the company’s strategy to enter the e-cigarette category, Philip Morris acquired Nicocigs Ltd. in
Jun 2014. It is a leading company in the U.K. with 27% share of the e-cigarette category of the region.
With the buyout Philip Morris gained immediate access to and a strong retail presence in the growing evapor category in the U.K.
There has been a general shift among consumers toward low-risk, smokeless tobacco products. To cater to the new consumer preference, Philip Morris expects to launch a set of Next Generation Products
(NGPs) in fourth quarter 2015, to attract adult consumers while reducing the risks related to tobacco products. The company also plans to increase investment in research and development for the category in
2015. The company launched another reduced risk product — iQOS — in two pilot markets in 2014 which received favorable response. The company launched iQOS in Switzerland in August with an initial focus on five major cities and began its national expansion in Japan in September. Its expansion plan for Italy are also on track which includes additional city launches commencing during the fourth quarter as well as planned city launches in other markets in late 2015 and early 2016.
Despite being a booming market, the tobacco industry faces many challenges which put margins under pressure. Governments around the world are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The FDA has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. Moreover, the FDA put a ban on the menthol-flavored cigarettes as it has been noted that these are more lucrative to starters and hence, will trigger a rise in smoking population in the nation. Moreover, the U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. This will also make the
U.S. government impose plain packaging on tobacco companies, in turn affecting Philip Morris.
After regular cigarettes, ecigarettes have also come under the FDA’s review. It requires all buyers to be at least 18 years of age in both the U.S. and the U.K. During 2012, the FDA indicated that it intends to include ecigarettes under the definition of “tobacco product”. In Apr 2014, the FDA proposed to regulate e-cigarettes, cigars, pipe tobacco, hookahs (water pipes) and dissolvable tobacco products, owing to the growing popularity of these items among youngsters.
As of July 6, 2015, the FDA did not issue a final rule on this matter. However, the proposed rules, if finalized, will limit sales to minors, ban free samples and require companies to give ingredient details and warning labels as well as seek federal approval to sell e-cigarettes. However, the FDA does not recommend a restriction on flavored products or online sales and advertising of e-cigarettes.
Dec11, 2015
Provided below is the summary of rating and valuation as per Zacks Research Digest:
Rating Distribution
Positive
Neutral
63.6%
↑
36.4% ↓
Negative
Avg. Target Price
Maximum Target
0.0%
$89.88
↑
$93
.00↓
Minimum Target
No. of Analysts with Target Price/Total
$82.00
8/11
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Risks to the achievement of target price include high sensitivity of cigarette volumes to taxes/prices, government regulations (regulatory actions such as smoking bans, health warnings, packaging or display restrictions, additional disclosures or testing requirements, bans on advertising promotions), illicit trade of fake cigarettes and the increasing health awareness that is reducing tobacco consumption and leading to a switchover to alternative tobacco products. As most of Philip Morris’ operations are located overseas, a strong dollar may adversely impact its profitability.
Philip Morris Beats Third-Quarter Earnings & Revenues, Down Year over Year - Oct 15, 2015
Philip Morris International’s third-quarter earnings and revenues beat the respective Zacks Consensus
Estimate. Results, however, declined year over year due to lower volume.
Philip Morris’ adjusted earnings per share of $1.24 surpassed the Zacks Consensus Estimate of $1.11 by
12%. However, earnings declined 10.8% year over year from $1.39 due to currency headwinds and lower sales. Excluding an unfavorable currency impact of $0.37, earnings went up 15.8% from the year-ago quarter.
Revenues and Margin
Net revenue (excluding excise taxes) decreased 12% year over year to $6.9 billion due to currency headwinds. Results, however, beat the Zacks Consensus Estimate of $6.7 billion by 2.7%.
Excluding currency, revenues went up 5.9% backed by improving macroeconomic environment and lower gas prices. Cigarette shipment volume, however, dipped 1.5% to 218.9 billion units mainly due to unfavorable currency translations. Lower shipments in most of the geographic regions of European Union,
Asia and Latin America and Canada were also responsible for the decline.
Results in the third quarter were supported by continuous market share gains. International market share, excluding China, and the U.S. increased 0.3 points to 29.2% with strong growth in EEMA and Latin
America and Canada region. Marlboro was a key growth driver increasing 0.4 points to 9.9%.
Philip Morris' quarterly gross profit declined 11.3% from the prior-year period to $4.5 billion as a result of lower revenues. Operating income slipped 11.5% year over year to $2.95 billion due to higher operating expenses.
The cigarette volumes of Marlboro and L&M, its two largest brands, increased 2.1% and 9.3%, respectively, in the quarter.
Based on Nielsen retail audit data, August quarter-to-date market share increased 1.4 points to 73.7% driven by Marlboro and the company’s leading low-price brand, Fortune. This positive share performance was driven by two main factors. First reason being reduced gaps between premium and low priced cigarettes following price increases for low price brands. This has led to adult smoker upgrading to
Marlboro across all three pillars and fortune. And secondly, the strengthened portfolio aided by brand building initiatives including new launches and innovative line extension.
Guidance
Philip Morris upped the full-year 2015 earnings growth rate to a range of 11 –12% from 9–11%. The company expects negative currency to impact earnings by $1.22 per share.
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Fourth-quarter results will be impacted by incremental investments to support the expansion of iQOS (less harmful tobacco products) including accelerated spending for planned launches in 2016 and to further reinforce the favorable momentum of Philip Morris’ cigarette brand portfolio.
During 3 Q15, Philip Morris’ net revenue decreased 12% y/y to $6.9 billion, owing to unfavorable currency impact and an undesirable volume mix that were partly offset by price increases. Excluding the impact of unfavorable currency translation of $1.4 billion, net revenue gained 5.9% y/y driven by an improved macroeconomic environment and lower gas prices. The company results are in line with the Zacks Digest average revenue.
Cigarette shipment volumes decreased 1.5% to 218.9 billion units. Lower shipments to Asia, especially
Indonesia, Japan and Pakistan, were responsible for the decline.
Results in the third quarter were backed by continuous market share gains. International market share, excluding China and the U.S., increased 0.3 points to 29.2% with strong growth in EEMA, Latin America and Canada. Marlboro was a key growth driver, increasing 0.4 points to 9.9%.
Shipment volume of the Philip Morris brand went up 17.9% to 9.4 billion units, driven by morphing from
Diana in Italy. Shipment volume of the L&M brand went up 9.3% to 26.2 billion units, driven by growth in
EEMA, notably Egypt, Turkey and Saudi Arabia, and in the EU, particularly Portugal. Shipments of Bond
Street increased 0.8% to 12.1 billion units driven by gain in Australia and Russia. Shipments of Marlboro cigarettes increased 2.1% to 74.2 billion units due to strong business in the EU, particularly Spain, partially offset by softness in markets of Italy and the UK. In the EEMA region, Marlboro shipment was driven by strong business in Saudi Arabia and Turkey. In Asia, Marlboro volume was driven by Japan, the
Philippines and Vietnam.
Cigarette shipments of Lark decreased 18.3% to 7.3 billion units due to weakness in Japan. Shipments of the Chesterfield brand declined 6.1% mainly due to decline in the EU region, particularly in Italy and
Portugal, and in the EEMA region, mostly in Russia and Ukraine. Cigarette shipments in Parliament went down 4.4% due to a decline in Kazakhstan, Russia, Korea and Ukraine.
Shipment volumes of Other Tobacco Products (OTP) were down 8%.
Segments
European Union (EU)
Net revenue in the EU decreased 13.4% to $2.0 billion hurt by currency headwinds. Excluding the impact of currency translations, revenues climbed 4.5% year over year primarily due to positive pricing, especially in Germany and Italy. Market share in the EU remained flat at 40.4%.
Cigarette shipments declined 0.8% to 48.8 billion units owing to weakness in Italy and the UK.
Eastern Europe, the Middle East and Africa (EEMA)
Net revenue in the Eastern Europe, Middle East & African (EMEA) region dropped 13.8% to $2.1 billion due to unfavorable currency impact. Excluding the impact of currency translations, revenues went up 9% year over year backed by favorable pricing in Russia, Turkey and Ukraine.
Shipment volume increased 2.6% year over year to 79.3 billion units mainly due to the Egypt, Russia,
Saudi Arabia and Turkey. Cigarette shipment volumes of Marlboro went up 1.1% to 23.1 billion units, driven by strong performance in Saudi Arabia and Turkey, partially offset by Algeria, Egypt and Ukraine .
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Asia
Asia recorded net revenue of $2.0 billion, down 11.1% due to currency headwinds. Excluding currency, revenues went up 0.9% year over year supported by favorable pricing, primarily in Australia and
Indonesia.
Shipment volume decreased 6.4% year over year to 67.8 billion units due to weakness in Indonesia,
Japan and Pakistan.
Latin America & Canada
In Latin America and Canada, revenues decreased 3.5% to $804 million. Excluding currency, revenues improved 13.9% mainly on the back of favorable pricing in Argentina, Brazil, Mexico and Canada.
In Latin America and Canada, cigarette shipment volumes slipped 1.9% to 23.0 billion units mainly due to weakness in Argentina, Brazil and Ecuador.
Provided below is a summary of revenue as compiled by Zacks Digest:
Revenue ($M) 3Q14A 2014A 2Q15A 3Q15A 4Q15E 2015E 2016E
Total Revenue $7,856.0 $29,767.0 $6,859.0 $6,927.0 $6,639.7 $27,041.7
↓ $28,023.7↓
Digest High $7,856.0 $29,767.0 $6,859.0 $6,927.0 $6,720.0 $27,122.0
↓ $28,479.0↓
Digest Low
YOY Growth
$7,856.0 $29,767.0 $6,859.0 $6,927.0 $6,553.0 $26,955.0
↑ $27,697.0↑
-0.9% -4.6% -12.0% -11.8% -7.7% -9.2%
↓
3.6%
↓
Please refer to the Zacks Research Digest spreadsheet of Philip Morris for specific revenue estimates.
Philip Morris' quarterly gross profit declined 11.3% from the prior-year quarter to $4.5 billion, mainly due to lower revenues. Adjusted operating companies income (OCI) slipped 12.1% year over year to $3.03 billion due to an undesirable volume mix and higher marketing, administration and research costs. OCI is operating income excluding general corporate expenses and the amortization of intangibles, plus equity
(income)/loss in unconsolidated subsidiaries, net. Adjusted operating companies margin shrank 0.1 pp to
43.8%.
European Union: Adjusted OCI dropped 13.3% to $1.0 billion (up 7.4% excluding unfavorable currency) due to unfavorable volume mix. Operating income margin increased 0.1 pp to 49.7%.
Eastern Europe, Middle East and Africa (EEMA) : Adjusted OCI slipped 14.2% to $1.03 billion (up
12.3% excluding the impact of unfavorable currency) mainly due to unfavorable volume mix. OCI margin shrank 1.5 pp to 49.2%.
Asia : Adjusted OCI slipped 13.6% (up 1.6% excluding currency) to $690 million due to due to unfavorable volume mix. Adjusted OCI margin of 34.8% declined 1.0 pp.
Latin America and Canada: Adjusted OCI increased 7.3% y/y (up 26.3% y/y excluding currency) to $294 million as favorable pricing offset the impact of an unfavorable mix.
Provided below is a summary of margins as compiled by Zacks Digest:
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Margins
Gross
Operating
Pre-Tax
Net
3Q14A 2014A 2Q15A 3Q15A 4Q15E 2015E 2016E
65.2%
42.8%
39.4%
27.5%
64.9%
41.3%
37.8%
26.4%
65.3%
42.4%
38.6%
27.4%
65.6%
42.9%
39.3%
27.7%
63.9%
32.2%
28.5%
19.4%
65.3% ↓
40.3% ↓
36.5%
↓
25.4%
↓
65.5% ↓
41.9% ↓
38.3%
↓
26.5%
↓
Please refer to the Zacks Research Digest spreadsheet of Philip Morris for specific margin estimates.
Outlook
The company did not provide any outlook for margins.
Earnings per share of $1.24 dropped 10.8% y/y due to soft sales and unfavorable currency. Excluding an unfavorable currency impact of $0.37, earnings increased 15.8% from the prior-year quarter. The company’s results were in line with the Zacks Digest average EPS.
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS 3Q14A 2014A 2Q15A 3Q15A 4Q15E 2015E 2016E
Digest High
Digest Low
Digest Avg.
Digest YoY Growth
$1.39 $5.02 $1.21 $1.25 $0.86 $4.47 $4.86
$1.37 $5.02 $1.21 $1.24 $0.80 $4.41↓ $4.70↓
$1.39 $5.02 $1.21 $1.24 $0.82 $4.43↓ $4.77↓
-3.8% -7.0% -14.0% -10.5% -20.6% -11.8% ↓ 7.7% ↓
Outlook
Philip Morris expects fiscal 2015 earnings growth rate of 11 –12%, higher than prior expectation of 9–11%.
Please refer to the Zacks Research Digest spreadsheet of Philip Morris for specific EPS estimates.
Research Analyst
QCA
Lead Analyst
Last Done by
Copy Editor:
Content Ed.
Reason for Update
Sarmistha Roy Chowdhury
Kinjel Shah
Sneha Nahata
Japamala Mukhopadhyay
Sayantani Sinha Roy
Sneha Nahata
3Q15 Earnings Update
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