It is always easy to base long-term predictions on recent trends. While short-term price movement can often be misleading, looking at the future differently than the present is always difficult.
Philip Morris International (PM) has been one of the best performing stocks in the market over the last year. While traders and investors have consistently and incorrectly viewed this company in the past as being overly exposed to the EU and the Euro, Philip Morris International has consistently grown its earnings at over 10-12% over the last several years.
Still, the Euro is just a couple percentage points off its three year low.
Philip Morris International gets nearly 30% of its revenues from the EU, and nearly 40% the company's overall revenues from Europe. Despite this company's strong performance over the last several years, Philip Morris International has still been impacted by the weakness in the EU and the sell-off in the Euro, with management recently reporting a nearly 10% drop in EU revenues last quarter and also guiding to a likely 5% impact on earnings per share from forex moves.
Philip Morris will also likely be increasingly affected over the next several years by the growth outlook in the EU and forex moves for several reasons.
The main reason Philip Morris International has been able to consistently grow the company's earnings over the last several years while the EU has remained weak is because of the company's extremely impressive recent growth in Asia. Philip Morris International reported 20% year-over-year volume growth in this region last year, with the company's strongest growth in this market coming in Japan and Indonesia. The company's strongest recent growth in Asia was in Japan, where the recent earthquake and subsequent tsunamis that prevented the world's third largest tobacco company, Japan Tobacco, from being able to ship cigarettes for several months.
Still, while Philip Morris International has consistently grown its earnings at a double digit rate over the last couple years, the company faces significant headwinds in Asia today. Japan Tobacco recently increased the company's market share in the important Japanese market by nearly 5%, and Japan and the Philippines are also considering sizeable new tobacco taxes as well. The company's Latin American and North American revenues also continue to be weak, with management recently reporting fair revenue growth year-over-year.
This is why the European economy and forex moves will be much more important to Philip Morris International's earnings over the next year. With the company's growth and volume numbers in Asia likely to slow, and the company's EU revenues recently falling nearly 10% last quarter, Philip Morris International will likely need to refocus on Europe if the company wants to continue to grow earnings at a low double digit rate.
To conclude, dividend companies with modest growth such as Altria (MO), Procter & Gamble (PG), and AT&T (T), have been particularly strong performing stocks of late as well, but Philip Morris International has consistently grown the company's earnings and increased dividend payouts at a double digit pace over the last several years. While Philip Morris International has consistently traded at around 15x average estimates of next years likely earnings while the Euro has fallen over the last several years, if forex moves begin to reverse and the company's EU revenues improve, the stock will likely trade at a premium multiple. If the company trades at 17-18x fairly conservative earnings estimates of $5.75 a share for 2012, the stock would trade at nearly $110 a share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
