Philip Morris (PM) Misses Estimates Due to Sluggish Growth in Europe

Source from:  Investor Guide  10/23/2012

Tobacco giant Philip Morris International (PM: Charts, News) slid last week after the company's third quarter earnings missed analyst estimates due to sluggish sales in the European Union. Philip Morris International, which was spun off from American tobacco company Altria (MO: Charts, News), consists of all of Altria's former international holdings and is currently the world's largest publicly traded tobacco company. The company's earnings per share came in at $1.32 per share, or $2.23 billion, a 6.3% dip from the $1.35 per share, or $2.38 billion, it earned a year earlier. Excluding one-time charges, earnings came in at $1.38 per share, missing the average analyst forecast of $1.39 per share on the same basis. A strong U.S. dollar also crimped the company's bottom line. Philip Morris' net revenues before excise taxes came in at $7.92 billion, a 5.3% decline from the prior year quarter. Its top line was also hit by unfavorable foreign exchange rates, which cost an additional $731 million. Analysts had projected revenue of $8.25 billion.

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Philip Morris attributed the disappointing miss on both top and bottom lines to the ongoing debt crisis in Europe, one of its largest markets, where high unemployment has forced smokers to either reduce tobacco consumption or switch to cheaper brands. Philip Morris had topped analyst profit estimates for seven consecutive quarters prior to Thursday's earnings. European sales slid 15% during the third quarter, while total shipments to the regions dropped 8.1%. However, Philip Morris posted growth in its other regions – with 3% growth in the EMEA (Eastern Europe, Middle East and Africa) region and 0.6% growth in Asia. Looking forward, Philip Morris narrowed its prior full-year profit guidance of $5.10 to $5.20 per share down to a range between $5.12 to $5.18 per share. This reduction in the high end disappointed analysts, who had on average expected $5.20 per share.
 
Despite Philip Morris' lackluster earnings and lowered outlook, analysts remain divided over the stock. Analysts at Nomura were decidedly bearish, reiterating a "reduce" rating on shares with a price target of $83.70. Meanwhile, Deutsche Bank analysts reiterated a "buy" rating on the stock with a $95.00 price target on the stock. The stock has risen 34.8% over the past twelve months.
 
Fundamentally, Philip Morris trades with a higher multiple compared to all of its main industry peers, including former parent company Altria Group, Reynolds American (RAI: Charts, News) as well as Lorillard (LO: Charts, News). However, Philip Morris has the strongest exposure to key emerging markets with its flagship brands, which include Marlboro, Parliament and Virginia Slims, while its peers are comparatively bound to their own American and British markets. Enditem