This recovery, however, is unjustified for the reasons discussed in this article.
Declining Unit Sales
Per the company's most recent earnings release, cigarette shipment volume of 190.2 billion units dropped by 6.1 billion units or 3.1 percent from the year-ago quarter. Even the heated tobacco unit shipment volume of 12.2 billion units dropped by 3.5 billion units or 22.2 percent in the same period. So much for replacing cigarettes...
Even though the company beat top line expectations, its revenue still plunged by 10 percent to $7.5 billion from $8.3 billion in the year-ago quarter.
In fact, the company's quarterly revenue has been flat now for eight years:
Unit price increases have so far been enough to fully offset the persistent declines in cigarette shipment volumes, but I expect low inflation across the world to, at some point not too far in the future, cap future cigarette price increases, leaving the company and its investors with declining unit sales.
Deteriorating Operating Margin
The following graph illustrates the company's worsening operating margin:
As the above graph illustrates, the company's trailing twelve-month ("TTM") operating profit margin has declined from 44 percent in 2014 to now its lowest point in the recent history of 38 percent. The trend has been downward.
My take is that management has sacrificed growth in order to preserve profitability, but the operating margin has continued to decline.
Risky Balance Sheet
Despite years of zero share repurchases, the company's balance sheet leverage remains at historically high levels:
As the above graph illustrates, the company's balance sheet leverage persistently increased from 19 percent in 2008 to more than 90 percent in 2015, as the company continued to repurchase shares.
Limited Return Of Capital
Management has failed to derisk the company's balance sheet, even though it eliminated share repurchases altogether and slowed down dividend growth:
Following five years of declining dividend growth, the company recently increased its dividend by 6.5 percent to an annualized rate of $4.56 per common share. Share repurchases, however, remain elusive.
Risk In Forecast
In its most recent earnings release last week, the company provided investors with a 2019 full-year forecast:
Reported diluted earnings per share forecast to be at least $5.37, at prevailing exchange rates, representing a projected increase of at least 5.7% versus reported diluted earnings per share of $5.08 in 2018.
The company then listed its assumptions in the same press release, and I found it interesting that management assumed both:
- "A total cigarette and heated tobacco unit shipment volume decline for PMI of approximately 1.5% to 2.0%," which represents an improvement from the recent history, along with;
- "An increase in full-year reported operating income margin of at least one percentage point, ex-currency, compared to 2018," which also represents a significant improvement from the deteriorating margin trend in recent years.
I expect the company to achieve either the unit shipment volume target or the operating income margin target, depending on unit price increases, but not both.
Philip Morris' stock has recovered along with the general market, but for the reasons discussed in this article, I continue to rate the company a "Sell" with a price target of $25 per share, which I first discussed in my April 2018 article.
Disclosure: I/we 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.