Philip Morris (PM) has delivered solid financial performance in the past. Analysts have projected a high next five-year growth rate of 10.2% per annum, as the company's fundamentals remain strong. PM enjoys a diverse geographical revenue base, which remains an important growth driver for the company.
However, the declining volume of traditional cigarettes remains a concern for the company. In the recent second quarter, total shipment volumes for the company were down 3.9% YoY. However, according to the presentation made by PM yesterday, there are signs of an early improvement for the company. While sales volume for European markets continues to decrease, there are some positive trends if we look at volumes for three month moving average through July. Europe's cigarette industry volumes decreased almost 6.5% for three months rolling average through July, better than the 8.5% decrease YTD. Germany remained a key driver for the volume improvement for European markets, as its sales volume was only down 1.6% for the rolling three months through July, better than the 5% decrease YTD. The following table shows the sales volume trend for different European markets.
Source: Presentation Slides
The performance of the Japanese market remains a near term concern for the company. PM's market share in Japan was down 1.3% YoY to 26.5% in July. However, the company believes it will overcome this particular concern going forward, as it already has strategies in place to address the issue. The two key near term objectives for the Japanese market remain reinforcing leadership in the growing menthol segment and improving the performance of the non-menthol segment.
Given that sales volumes for both the industry and the company are on a decline, price increases remain an important tool for PM to expand its top and bottom line results. PM remains optimistic that its global price increases will offset the sales volume decline and grow its earnings. PM was successful in achieving a pricing variance of over $1 billion in 1H2013, representing an increase of almost $200 million as compared to 1H2012.
Source: Presentation Slides
Moreover, product innovation is a key long term growth driver for the company. Given that the sales volume for traditional cigarettes is on a decline, primarily due to health concerns and tougher regulations, PM plans to launch three different types of "Next Generation Products" within the next five months, which are currently only called Platforms 1, 2 and 3. Currently, the company has been working towards clinical trials of its Next Generation Products, with the focus being mainly on Platform 1 (Platform 1 heats tobacco using external heat source);the company expects to obtain a high level of customer acceptance for Platform 1 products. PM has commenced 5 out of 8 sets of full clinical studies for its Next Generation Products; the results of these ongoing studies are expected in 2014. Consistent with its Next Generation Products initiatives, the company is on track to build two manufacturing facilities by 2016.
PM maintained its EPS guidance range of $5.43-$5.53 for 2013, as compared to an EPS of $5.17 for 2012. Also, the company expects its adjusted EPS for 2013 to increase by 10%-12% YoY. I think that positive takeaways from yesterday's presentation are that there are early signs of an improvement, and the company's financial performance for 2H2013 will be better than 1H2013. Also, PM's new product initiative, Next Generation Products, remains an important long term growth driver.
The stock is down almost 10% since its second quarter earnings release, and currently offers an attractive dividend yield of 4.1%. I believe the recent pullback offers investors a good entry point, as the stock is attractively valued, and given its double-digit growth forecast. PM is currently trading at a cheap forward P/E of 13.8x, as compared to a forward P/E of 15x for the S&P 500.