Philip Morris Earnings: The Long-Term Reality

| About: Philip Morris (PM)

Summary

Currency headwinds hurt this company more than it does the typical US trading company.

Shares are down more than 3%.

Long-term investors are likely to benefit from such pullbacks.

Philip Morris International (NYSE:PM) has just reported its Q4 earnings as Seeking Alpha has covered here. Earnings per share came inline, while revenue missed by $100 million. This has sent the stock down more than 3% as of this writing. Should long term investors panic? We look at some reasons to still be optimistic about this company and as an extension, the stock. Let us get into the details.

Benefit of the doubt: If you look beyond the headlines, you will recognize the fact that revenues were in fact up 4% YoY if currency fluctuations are taken out of picture. Granted, "ifs and buts" don't work in the real world but the reality is, Philip Morris operates 100% outside the US, which makes it a unique proposition.

Many stalwarts that have global presence have already complained about currency headwinds and one can imagine its impact on a company that operates 100% outside the US. Stronger dollar is perhaps just an easy reason for most companies to use but for Philip Morris it is the reality. Forex is completely out of PM's control and people who have been investing for decades know that interest rates and currency exchange rates are factors that flip and flop. Some years they are in your favor, some year they aren't. If you believe in the company, its management and its products, stick with it. Do you? We certainly believe that a company that operates in 200 countries and holds 15% of the global market share deserves the benefit of the doubt.

Paid to wait: Another reason we aren't panicking is that the company pays very well while we wait for the macro factors to get better. How well paid? Let's look at some key aspects.

  • 4.70% yield, which beats the market average handsomely.
  • Highest among the leading tobacco names. Altria Group (NYSE:MO) yields 3.70%. Reynolds American (NYSE:RAI) yields a tad below 3.00%. British American Tobacco (NYSEMKT:BTI), which is PM's global competitor, yields around 4.00%. Please pay attention to the fact that BTI pays twice a year and this has always confused investors when calculating its current yield.
  • A dividend increase waiting in September. Why are we so confident the company will increase dividend in spite of the current mood? To put it short: lineage.

Lineage: That brings us to the next point. As independent as this company is from its spin-off parent Altria, it is hard to ignore the historical aspects. Altria's culture and practices are in PM's blood. Make no mistake about it. Altria went through much bigger troubles than currency headwinds and temporary dip in volume. It had to deal with lawsuit after lawsuit, slapped with billions in fines, and even had to cut the price of its flagship product. The short-term market responded with a 26% price cut to the shares but the rest is history as they say. Altria rewarded long term investors through thick and thin, never reducing its dividend to shareholders. It's now part of folklore that Altria was the best performing stock over a 50 year period. The biggest reason for this performance was the relative undervaluation of the stock that combined with ever increasing dividends.

Looking Forward: No, history is not the only thing we rely on when it comes to Philip Morris or investing in general. Philip Morris is taking all the right steps that are within its control. For example, Marlboro 2.0 is still being rolled out in many markets, including some key European countries. This particular product is aimed at grabbing some "adults under 30" market share from the competitors. The rollout started in 2014 and is set to finish in 2016. This is a smart move as people under 30 are likely to keep changing their brands and aren't brand loyal, as reported in the link above.

E-Cigarette market is just getting started. The big companies are still figuring out their strategy and targets as this lucrative opportunity stares at them. It's a given that traditional smoking is generally on the decline and when you factor in that all major players have their own E-Cigarette brand now, the potential here becomes apparent. On the other hand, emerging markets are still very much emerging, with higher disposable income and population growth. As explained earlier, with presence in more than 200 countries, Philip Morris knows which market it can excel in the most.

If nothing else works out, tobacco stocks have a couple of options that have always worked in their favor: cost-cutting and price increases. They can afford these because of their efficiency and pricing power/brand respectively.

And not all macro factors are against this stock. Investors are still wary of the way 2016 has started and are seeking relative safety. Philip Morris is likely to get the attention of income seekers (individuals and funds) who aren't looking for much thrill. In addition, if the Fed does not stick with its four rate increases or if the increases aren't as much as expected, the dollar will weaken. The dollar has appreciated aplenty in anticipation of the increases. A weaker dollar will benefit Philip Morris more than the typical US trading company.

Conclusion: While some might come back with specific concerns about a tiny blot in the earnings, downbeat outlook, lawsuits or plain packaging, we remain undeterred shareholders of this company. If it's obvious to the crowd, the easy money has been made. Hence, we hope more people bet against this juggernaut.

Disclosure: This article is strictly from the investment perspective and does not endorse/recommend smoking.

Disclosure: I am/we are long PM.

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.