Philip Morris International Inc. (PM), British American Tobacco PLC (ADR) (BTI): More Headwinds for This Tobacco Master

On July 18, the world’s largest publicly-traded tobacco company, Philip Morris International Inc. (NYSE:PM), reported its earnings for the second quarter. The company missed its earnings’ estimates by $0.11, mainly due to currency fluctuations.

With the tobacco industry facing an uncertain future, the question is: What is in store for Philip Morris International Inc. (NYSE:PM)?

Philip Morris International Inc. (NYSE:PM)

Quarterly earnings

In its second quarter, Philip Morris International Inc. (NYSE:PM) posted earnings of $2.12 billion, or $1.30 a share, falling 8% from the same quarter, last year. Excluding excise taxes, sales declined by 2.5% to $7.9 billion. Earlier, analysts at Thomson Reuters had forecast a profit of $1.41 per share on $8.17 billion revenue.

According to the company, Europe’s weak economy, unfavorable currency fluctuations and high excise taxes were the reasons behind a 6% decline in shipments. As Philip Morris International Inc. (NYSE:PM) only operates outside the U.S., a strong dollar compared to other currencies shrank company’s revenues. China’s slow economic growth also led to a lesser demand of cigarettes.

In Eastern Europe, Middle East and Africa, shipments were down by 3.6%. In Canada and South America, total shipments decreased by 2.4%. Due to a recent tax increase in Philippines, volume fell 3.5% in Asia.

Revenue slipped 3.5% in the EU and 5.7% in Asia. However, South America and Eastern Europe saw a revenue jump of 1.1% and 1.4% respectively.

Costs associated with manufacturing and selling of cigarettes increased 1% to $2.7 billion. Cigarette shipments fell 4% to 228.9 billion cigarettes amid volume declines across the globe.

Profit guidance

After posting its second-quarter results, Philip Morris International Inc. (NYSE:PM) also lowered its full-year profit guidance. The company now expects to earn $5.43 to $5.53 per share, down from its April guidance of $5.55 to $5.65. In the next quarter, analysts expect Philip Morris International Inc. (NYSE:PM) to earn $1.45 a share on total revenue of $7.99 billion. For the full year, analysts’ expectations stand at $5.46 per share on $31.55 billion revenue.

Going forward

The long term future of Philip Morris depends largely on global economic conditions and the U.S. dollar. With China reporting a second consecutive quarter of slow economic growth, cigarette demand is bound to remain low in the country. Just like China, Europe’s economic downturn would result in meager revenues for the company. Further, more taxes and smoking bans across the EU won’t help the cause either. As more and more people are getting health-conscious in East Asia, Philip Morris isn’t expected to grow significantly over there. As there are no major smoking bans in Africa, South Asia, and Latin America, the company would be able to increase its volume in these regions.

During the last few months, the Australian dollar (AUD) has lost more than 10% of its value, relative to the U.S. dollar. As a result, Philip Morris has suffered a lot in the Australian region. As AUD keeps on losing its value, things don’t look better for the company. A weak Yuan would further reduce Philip Morris’s profits in China. The same is the case with South Asian and African currencies. However, a stronger Yen and Euro would enhance company’s income to some extent. Thanks to a stable Canadian dollar, the North American region looks better.