The Impact Of Currency Fluctuations On Philip Morris

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Philip Morris International‘s (NYSE:PM) earnings are impacted significantly by foreign currency fluctuations. The company reports its earnings in dollars, but earns its income all over the world. In this article we take a look at the trends in the dollar index that impacted Philip Morris in 2014.

We have a price estimate for Philip Morris’ stock price of around $80 compared to a market price of around $83.

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Forex Impact Over The First Three Quarters

Currency fluctuations made their impact felt across all three quarters to date in 2014 in Philip Morris’ results. Strong currency headwinds dragged down Philip Morris International’s adjusted diluted EPS by $0.16, or roughly 12% during the first quarter. The impact was similar in Q2 as the company further revised downwards its 2014 EPS estimate by $0.10 or 2%, citing the strengthening of the U.S. dollar against other international currencies. Unfavorable currency fluctuations took a chunk out of Q3 earnings as well. It reduced the EPS by 12.5%, as the dollar index saw the dollar strengthen by about 7.5% (see Our Earnings Coverage For Q1, Q2 And Q3). As of the end of Q3, the expectation is for an adverse impact of approximately $0.72 per share for the full-year 2014. This will mean that the unfavorable currency situation would have reduced 2014 EPS by about 13%. [1]

Macroeconomic Factors That Influenced The U.S. Dollar In 2014

The most generic indicator of the value of the U.S. dollar is the dollar index. It measures the strength of the dollar against a basket of other major currencies. The dollar index was steady at around 80 through the first half of the year. The second half of 2014 saw it steadily increase to 90, [2] driven largely by influences of a domestic nature, related to U.S. GDP growth and monetary policy.

GDP growth data seems to have had a significant influence on the dollar index this year. In the first quarter, U.S. GDP growth disappointed and dropped 2.9%. This was mostly attributed to bad weather, and was a bearish influence on the dollar. However, expectations of the U.S. Federal Reserve cutting back on its bond purchases helped the dollar index remain steady. In Q3 and Q4, the U.S. economy grew at rates of 4.6% and 5%, respectively. This was on account of increases in consumer spending, exports and Government spending. This led to optimism about the health of the U.S. economy and led to a strengthening of the dollar in the second half of this year. [3] Falling oil prices due to a supply glut likely also contributed to the strengthening of the dollar.

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Notes:
  1. Philip Morris Q3 2014 Results []
  2. The Dollar Index Chart At Bloomberg []
  3. U.S. GDP Growth In Q1, Q2 and Q3 2014 []