Philip Morris Capitalizes On Growth Markets

| About: Philip Morris (PM)

International cigarette maker Philip Morris (NYSE:PM) announced strong fourth-quarter results. Revenue, net of excise taxes, grew 2.8% year over year to $7.9 billion, falling slightly short of expectations -- though that was mainly attributable to currency fluctuations. Adjusted earnings per share increased 13% year over year to $1.24, exceeding the consensus estimate by a few cents.

On a company-wide level, shipments of cigarettes grew 2.9% year over year (excluding acquisitions) during the fourth quarter. Revenue and earnings, when accounting for currency fluctuations, also looked much more favorable, growing 6% and 16%, respectively. Philip Morris used its strong cash flow generation to repurchase $2 billion of stock, while returning $0.85 per share (per quarter) to investors in the form of dividends.

Shipment strength diverged based on geography, with the European Union (shown below) an area of weakness during the fourth quarter and 2012.

Click to enlarge images.

Source: Philip Morris.

The company fought strong headwinds, as the aggregate EU cigarette market shipment volume fell 5.7% year over year. Philip Morris identified weakness in the broader economy and new excise taxes as the primary drivers of weakness, though the company was largely able to maintain market share, which was actually 40 basis points higher than the year-ago period at 38.4%. Full-year market share was unchanged at 38.1%. Adjusted operating companies income (OCI) fell 7% year over year in the region to $960 million (see below), but margins only declined 30 basis points to 46.5%.

Source: Philip Morris.

Still, we thought the year was relatively strong given the massive headwinds the company faced. Marlboro and Chesterfield exhibited relatively strong performance and share gains, and we saw the majority of the shipment weakness concentrated in France and Italy. Management indicated that shipment declines have largely moderated in France, and we believe gains in other markets will help offset EU weakness.

Source: Philip Morris.

Eastern Europe, Middle East, and Africa (EEMA) posted terrific income gains during the fourth quarter (shown above), driven largely by improved performance in Turkey, Egypt, and Russia. Total shipments increased 7% during the quarter, premium brands driving the strength up 7.7% -- with Marlboro and Parliament up 3% and 22%, respectively.

Although much of the gains in the fourth quarter seem to be driven by special circumstances, including an easy comparison to the same period a year ago and inventory building ahead of a new excise tax, we think the solid full-year results show a positive trend is taking hold in this segment. The firm made share gains in three vital countries (Russia, Turkey, and Ukraine), and the shift toward more premium products should help boost operating margins.

Source: Philip Morris.

Shipment growth in Asia was very strong during the fourth quarter, with volumes rising 5.4% year over year, driving revenue growth of 6% to $2.8 billion. Like in Turkey, much of the results were driven by special situations, and the firm actually lost market share in several key markets including Japan, Korea, and Indonesia. Philip Morris doesn't yet have a market position in China, but both Japan and Indonesia are huge markets in which the company maintains strong market share. We're optimistic about the long-term opportunity in this region, particularly since it isn't facing the same demand headwind that we see in most developed markets.

Source: Philip Morris.

The Latin America and Canada region is a significantly smaller segment than the rest of the firm, but the company posted fantastic earnings growth during the fourth quarter, even though shipments fell 1%. Restructuring gains and favorable pricing increases were the primary drivers of profit gains. The company continues its dominance in Argentina (74.6%) and Mexico (73%), even though results in Canada were fairly weak. As we mentioned earlier, this segment is fairly insignificant compared to the earnings throughout the rest of the company, but we like its strong share positions in several key markets.

Going forward, the firm anticipates full-year 2013 earnings of $5.68-$5.78 per share, which is strong growth on top of the firm's $5.17 per share in earnings during 2012. The company believes it will repurchase $6 billion worth of stock, and we believe the firm will be able to continue to grow its dividend -- which equates to an annual yield of 3.8% at current levels. We like Philip Morris' income profile, but we think shares are fairly valued. With Altria (NYSE:MO) already a constituent of our actively managed portfolios, we won't be picking up shares of the international cigarette maker at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Cigarettes, Earnings
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