Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Philip Morris International (PM) lost over 4% over the past week. The cigarette manufacturer reported its third quarter results on Thursday before the market open.

Third Quarter Results

Philip Morris reported third quarter revenues, excluding excise taxes, of $7.9 billion, down 5.3% on the year. Excluding negative currency effects and impact from acquisitions, revenues rose 3.4% on the year. Cigarette volumes fell 1.3% on the year, as a result of weakness in Europe. On average, analysts expected the company to report third quarter revenues of $8.3 billion.

Net income fell by 6.3% over the year to $2.23 billion. Earnings per share fell 2.2% to $1.32 per diluted share. In constant currencies, earnings per share would have risen 3.0% to $1.39.

Adjusted earnings per share came in at $1.38 per share, a penny short of analysts expectations of $1.39 per share.

In July of this year, the company completed its $12 billion share repurchase program, which began in May of 2010. The three-year repurchase program was completed ahead of schedule. In August, Philip Morris announced a new three-year $18 billion repurchase plan. During the year, the company repurchased $1.5 billion in shares.

Chairman and CEO Louis C. Camilleri commented on the results,

"Despite the difficult comparisons in the third-quarter, we remain confident that the fundamentals of our business are solid as a whole, which is testament to our progress, especially in our Asia and EEMA Regions. We expect to achieve our annual organic volume growth target of 1% in 2012 and our adjusted diluted EPS growth to be in line with our mid-to-long term constant currency annual growth target."

Segmental Information

European Union

Revenues for the division fell 15.2% to $2.12 billion, mainly as a result of a strong dollar. In constant currencies revenues for the area fell by 1.9%. Operating income fell by 14.0% to $1.08 billion, or 2.1% in constant currencies. Shipment volumes fell by 8.1% to 51.6 million units as shipments to Southern European countries, including Spain, Italy, Portugal and France fell in particular.

Eastern Europe, Middle East and Africa

Revenues for the division fell by a mere 0.1%. In constant currencies, revenues rose by 9.4%. Operating income rose by 13.2% to $1.05 billion, or 19.6% in constant currencies. Shipment volumes were up 3.0% to 81.4 million units. Favorable conditions in Egypt and Russia drove volume growth.

Asia

Asian revenues were down 1.4%, but up 2.4% in constant currencies. Operating profits fell by 0.9% to $1.30 billion and by 0.2% in constant currencies. Shipments rose by 0.6% to 79.5 million units. Growth was solid in the region except for Japan. Shipments to the country fell as a result of an inventory build up in the third quarter last year.

Latin America & Canada

Revenues in Latin America and Canada fell 2.4% to $827 million, but where up 7.3% in constant currencies. Operating income rose 4.7% to $267 million, up 11.4% in constant currencies. Shipments fell 4.9% to 24.0 million units.

Outlook

For the full year of 2012, Philip Morris now expects to report earnings per diluted share between $5.12-$5.18. Full year earnings were negatively impacted by the impact of a strong US dollar, lowering full year earnings per share by $0.23 per share. On average, analysts were looking for full year earnings of $5.20 per share.

Valuation

Philip Morris ended its third quarter with $4.8 billion in cash and equivalents. The company operates with $22.4 billion in short and long term debt, for a net debt position of $17.6 billion.

For the first nine months of 2012, Philip Morris generated revenues of $57.7 billion, including excise taxes. Net income attributable to shareholders came in at $6.7 billion, or $3.92 per share. Full year revenues including excise taxes could come in at $77 billion. Net income could come in around $9.0 billion, or $5.15 per share.

The market currently values Philip Morris at $148.5 billion. This values the firm at 1.9 times annual revenues and roughly 16 times annual earnings.

Currently, Philip Morris pays a quarterly dividend of $0.85 per share, for an annual dividend yield of 3.9%.

Investment Thesis

Year to date, shares of Philip Morris have gained some 12%. Shares started the year at $78 per share and steadily rose to $94 in the summer. As a result of the slightly disappointing results on Thursday, shares are exchanging hands at $88 per share.

Since the split-off from Altria (MO) in 2008, shares of Philip Morris have returned some 80%. Shares traded as low as $33 in 2009 and steadily rose to highs of $94 in 2012. Between 2008 and 2012, the company grew its revenues from $63.6 billion in 2008, to an expected $77 billion in 2012. Net income rose from $6.9 billion to an estimated $9.0 billion, in the meantime.

Over the past five years, the company retired some 15% of its shares outstanding, boosting earnings per share from $3.31 per share in 2008, to an expected $5.15 per share in 2012. Philip Morris is facing problems as volume growth in Europe remains under pressure. Volume growth in Asia and the rest of the world is not sufficient to offset declines in matured economies. Furthermore, volumes come under pressure in countries hit hard by the economic crisis, including Southern Europe.

While operations are stagnant, cash flows to investors remain significant. The company pays a dividend yielding almost 4% at the moment. Furthermore it retires roughly 4% of its shares outstanding per year, at is current repurchase rate of $6 billion per year. Combined, dividends and share repurchases total about 8% per annum.

Investors hunting for dividends could pick up shares for a nice annual paycheck but should not expect massive capital gains.

Source: Philip Morris: Declining Cigarette Volumes Don't Threaten Short-Term Cash Flows To Shareholders