Philip Morris' Second Quarter Reveals Volume Pressures

| About: Philip Morris (PM)

Philip Morris (NYSE:PM) issued lower-than-expected revenue and earnings in its second quarter Thursday. Net revenues, excluding excise taxes and currency, rose modestly (0.5%) thanks to improvements in 'Latin America and Canada,' while operating income, excluding unfavorable currency movements, fell more than 3% (led by more than a 9% slide in operating income in its 'Asia' division). Adjusted diluted earnings per share nudged up a penny, to $1.37, and we note that such improvement was augmented by its share repurchase program.

Philip Morris' cigarette shipment volume of 228.9 billion units fell nearly 4%. Though the pace of the volume decline slowed from the first quarter of the year, performance was clearly subdued, and volumes in the 'Eastern Europe, Middle East and Africa' region actually accelerated to the downside. The firm blamed unfavorable excise-driven price increases and general economic malaise for poor volume performance in Europe and pointed to a disruptive January 2013 excise tax increase in the Philippines and the timing of inventory movements in Japan for the underlying weakness in Asia. Total cigarette shipments of Marlboro fell nearly 6%, while shipments of L&M jumped roughly 6% thanks to strength in Egypt; shipments of Parliament advanced 4% in the period. The company noted share gains in a number of markets, including Canada, France, Germany, Italy, and the UK, but industrywide headwinds overwhelmed.

As a result of unfavorable currency movements, the firm cut its full-year bottom-line outlook to the range of $5.43 to $5.53 per share, below consensus estimates, but up from $5.17 per share during 2012. If it weren't for the stronger dollar, reported diluted earnings per share would be up 10%-12% from the adjusted measure in the year-ago period. Overall, Philip Morris' second-quarter performance left much to be desired.

Valuentum's Take

We tend to like cigarette-making firms because constituents possess significant pricing power, and Philip Morris is no exception. Though volume performance has been weak so far in 2013, the firm retains its exposure to fast-growing markets around the globe. We're also expecting a strong fourth quarter (see page 5 here) to help propel results to achieve the firm's expected bottom-line guidance range for 2013. And while we note Philip Morris boasts a very healthy yield, we hold US-based and higher-yielding peer Altria (NYSE:MO) in our actively-managed portfolios.

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.

Additional disclosure: MO is included in our actively-managed portfolios.