Philip Morris (PM) Q4 Earnings Match Estimates, Revenues Beat

Philip Morris International Inc. PM reported fourth-quarter 2019 results, wherein the bottom line came in line with the Zacks Consensus Estimate, whereas the top line surpassed the same for the seventh consecutive time. Also, the company’s top line rose year on year.

The quarterly results benefited from higher shipment volumes in the heated tobacco category. Additionally, favorable pricing was a key growth driver across most regions. On the flip side, dismal performance in the combustible category was a drag.

Quarter in Detail

Adjusted earnings per share of $1.22 came in line with the Zacks Consensus Estimate. The bottom line edged down 2.4% year over year. On a like-for-like (LFL) basis, after excluding currency, the bottom line rose 4.3%.

Philip Morris International Inc. Price, Consensus and EPS Surprise

Philip Morris International Inc. Price, Consensus and EPS Surprise

Philip Morris International Inc. price-consensus-eps-surprise-chart | Philip Morris International Inc. Quote

Net revenues of $7,713 million beat the Zacks Consensus Estimate of $7,680 million. The top line grew 2.9% in the reported quarter. On an LFL basis, the metric was up 6.3%, excluding currency. This was backed by favorable pricing variance, partly negated by adverse volume/mix.

During the quarter under review, revenues from combustible products fell 3% to $6,179 million due to declines in all regions, except South & Southeast Asia. Further, revenues in the RRPs improved 36.2% to $1,534 million. Most regions saw growth in RRPs, apart from South & Southeast Asia wherein revenues remained flat.

Total cigarette and heated tobacco unit shipment volumes dropped 5% to 192.2 billion units. Cigarette shipment volumes fell 8% to 175.1 billion units in the quarter, while heated tobacco unit shipment volumes of nearly 17.1 billion units surged 40.7% year over year.

Adjusted operating income grew nearly 6% to reach $2,863 million. On an LFL basis, after excluding currency, adjusted operating income improved 11.9% year over year. Adjusted operating margin expanded 1.1 points to 37.1% and 1.8 points to 36.7% (excluding currency and on an LFL basis).

Region-Wise Performance

Net revenues in the European Union increased 4.1% to $2,436 million. Revenues grew 8.6% at cc, courtesy of favorable pricing and volume/mix. Total shipment volumes in the region slipped 1.9% to 44,985 million units.

In Eastern Europe, net revenues grew 20.3% to $982 million and rose 16.8% at cc. The upside can be attributed to favorable pricing and volume/mix. Total shipment volumes inched up 1.2% to 31,105 million units.

In the Middle East & Africa region, net revenues declined 0.4% (down 1.6% at cc) to $984 million. Further, total shipment volumes fell 8.6% to 33,204 million units.

Revenues in South & Southeast Asia rose 21.7% (up 16.1% at cc) to $1,487 million. The upside was driven by favorable pricing variance, partly offset by adverse volume/mix. Shipment volumes declined 6.1% to 44,704 million units.

Revenues from East Asia & Australia fell 5.6% (at cc) to $1,270 million due to unfavorable volume/mix, partly compensated by pricing gains. Total shipment volumes dropped 5.8% to 18,725 million units.

Finally, revenues from Latin America & Canada decreased 29.7% (down 28.6% at cc) to $554 million. Moreover, total shipment volumes declined 11.3% to 19,484 million units.

Other Financials & Developments

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $6,861 million. Also, the company had long-term debt of $26,656 million and shareholders’ deficit of $9,599 million.

On Jan 29, Philip Morris announced a partnership with South Korea’s KT&G to commercialize the latter’s smoke-free products outside the country. The company’s deal with this South Korean nicotine and tobacco company will be effective for three years initially. This global collaboration aims at expanding the reach of KT&G’s smoke-free products to many other markets.

Guidance

Management is impressed with its 2019 performance, which saw broad-based IQOS improvement as well as robust pricing for the combustible tobacco category. The company is progressing well with its business transformation, with about 8% of shipment volumes and one-fifth of net revenues coming from smoke-free products. The company is also well placed in its combustible tobacco space, which is evident from the fact that Marlboro’s cigarette share for 2019 reached an all-time high of 10%.

While management foresees some hurdles in Indonesia in 2020, it expects to deliver currency-neutral net revenue and bottom-line growth in 2020 (on an LFL basis). In 2020, currency-neutral revenues are expected to rise about 5% on an LFL basis. Total cigarette and heated tobacco unit shipment volumes are likely to drop 2.5-3.5% on an LFL basis. In fact, international industry volumes are also expected to decline, owing to higher excise taxes in Indonesia and the cigarillo category gaining traction in Japan.

Currency-neutral adjusted operating margin is expected to expand 150 bps on an LFL basis, thanks to cost-control measures, which are expected to completely offset additional investments in RRPs. Further, management expects effective tax rate for 2020 to be roughly 23%.

Finally, the company envisions adjusted earnings per share of $5.50 for 2020. Excluding the expected currency impact of 4 cents, earnings are anticipated to be at least $5.54, which indicates growth of at least 8% from the year-ago quarter’s reported figure. The Zacks Consensus Estimate for 2020 is currently pegged at $5.63 per share.

Shares of Phillip Morris have gained 2% in the past six months compared with the industry’s growth of 6.7%.

Consumer Staple Stocks Worth Noting

 Vector Group VGR, with a Zacks Rank #1 (Strong Buy), has an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.

Constellation Brands Inc. STZ, with a Zacks Rank #2 (Buy), also has a robust earnings surprise record.

Lamb Weston LW has a long-term earnings growth rate of 8.8% and a Zacks Rank #2.

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