Philip Morris Earnings Preview: Positive Results Expected But Currency Headwinds Might Weigh In

Global tobacco giant, Philip Morris International (NYSE:PM), is set to report Q2 2015 earnings on July 16. In spite of unfavorable exchange rate movements, the tobacco house managed to deliver solid results in Q1, with net revenues increasing 9.1% on a currency neutral basis against strong pricing, market share gains, and favorable volume mix in some markets. Here is a snapshot of what could work in Philip Morris’ favor going into Q2, and what stands to threaten prospects.

A Survey Of Major Markets Shows Positive Prospects

Since Philip Morris operates across diverse geographical regions, market specific trends play a key role in determining its performance. Last quarter, Eastern Europe, Middle East and Africa (EEMA) proved to be the largest contributor to results, with revenues growing almost 14% on a currency neutral basis. The performance was aided by market share gains for key brands Parliament, Marlboro, and L&M in North Africa, Russia, and Saudi Arabia. Furthermore, Philip Morris faced a 4.4% volume increase in the region predominantly guided by markets outside of Eastern Europe. ^[1] Philip Morris could gain plenty from this market going into Q2 and beyond, especially as purchasing power increases in many developing markets across Africa.

Even in the European Union, Philip Morris managed to see volume growth in spite of a declining overall industry. In Q1, Philip Morris managed to deliver a 2% increase in volumes against higher market shares of key brands such as Marlboro, L&M, and Chesterfield. Even in markets such as Asia, and Latin America and Canada, where Philip Morris lost out on volumes, they were able to post revenue growth of 6.5% and 4.5%, respectively, against stronger pricing. ^[2] In fact, according to the company, although smoking prevalence remained unaffected in spite of price hikes in Asia, average daily consumption among the smokers who opt for low-end brands was hampered, where prices underwent an approximate 27% increase. However, the company anticipates a recovery as consumers increasingly get accustomed to the new prices. In this case, Asia could show strength going into Q2.

Innovations Could Fuel Growth

Apart from gaining market shares and seeing volume growth in a number of markets, Philip Morris could gain from new innovations. Top on this list is the Marlboro 2.0 Architecture, which incorporates a new pack and filter design and a different blend. The company anticipates further share gains to come from the roll-out of this product in the full-year. Philip Morris has also undertaken steps to capitalize on growth prospects in some markets. For instance, as consumers shift to machine-made products in growth markets like Indonesia, Philip Morris recently introduced the U Bold in the fast growing “full flavor machine-made kretek segment” to leverage the opportunity in the space. Furthermore, the company has also been dabbling in reduced-risk products (RRP) and e-cigarette segments, which could also help gain traction going into Q2. The pilot launch of the iQOS in the RRP realm across Nagoya and Milan exceeded expectations, according to the company, and has been a useful milestone to further experiment in this segment. Going into Q2 and beyond, further innovation and the national roll-out of brands such as iQOS could help Philip Morris gain more traction in terms of ensuring sales.

A Note On Currency

Philip Morris’ performance is often conditional on exchange rate movements, since a majority of the company’s sales are conducted in local currencies. In this case, a stronger U.S. dollar implies fewer dollars in exchange for the local currency. The Dollar Currency Index, which measures the strength of the U.S. dollar against a number of other currencies, has continuously gained points over the past year, to hit its highest level in nine years. In Philip Morris’ case, a weaker Argentine peso, Australian dollar, Canadian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Polish zloty, Russian ruble, Turkish lira, and the Ukraine hryvnia, resulted in lost revenues of approximately $2.4 billion in the three months ending March 31. Currency headwinds could persist even in Q2, since there has been no indication of the dollar easing. However, currency fluctuations could be a temporary phenomenon and Philip Morris could be poised to gain going forward in light of their strong currency-neutral results.

We have a price estimate for Philip Morris’ stock price of around $81, which is almost in line with the current market price.

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1. Philip Morris International (PM) On Q1 2015 Results – Earnings Call Transcript [↩]
2. Form 10-Q, SEC [↩]