Philip Morris Focuses on Hot E-Cigarettes to Overcome Expected Cool Earnings

NEW YORK (TheStreet) -- You do not normally associate the clean Alpine airs and views of Switzerland with the tobacco industry but this week Philip Morris International (PM) held its two-day investor meeting in Lausanne, where the company has a large Operations Center.

Since early Thursday when the company confirmed that a mix of the impact of currency movements, a weak economy in Europe and the impact of illicit trading in Asia raised the possibility of earnings "...at the lower end of our 2014 guidance for full-year currency-neutral adjusted diluted EPS growth of 6%-8%," the shares have fallen around 5%. They currently trade around $84, down 3.5% for the year to date.

So bad tidings from Switzerland for one of the most popular shares for income seekers in the S&P 500?

Actually not at all.

Philip Morris International talked about all the touch points that tobacco sector investors have got excited about over recent years including pricing power, cost efficiencies and the continued emerging markets growth potential. Driven by a strong range of brands led by Marlboro, the company retains market leadership in three out of its four global geographic sectors.

Certainly trading conditions remain competitive, with cigarette volumes declining in many regions and illicit trade still a challenge, but the commitment to grow the current 4.2% dividend yield and continue share buybacks shone through from the meeting.

Also, the company is changing with the times.

Legal changes around the world are hindering the average cigarette smoker from lighting up wherever they like. One solution is the growth of the "e-vapor" or electronic cigarette industry where technological innovation allows a cigarette-like ritual for consumers but without the smoke, ash or smell. As with any forward-looking company Philip Morris International is embracing technology and announced the purchase of a company called Nicocigs Limited that will undoubtedly be part of their global push in this area.

Read: eCig Advertising Marketing Snares the Cool eKid Generation in Net

There is a big prize on offer. Globally cigarettes had a retail value of over $400 billion in 2013 while e-vapor products only came in at $2 billion. Give it a few years, however, and the e-vapor market is likely to be a lot bigger. Philip Morris International showed some evidence from Italy where only 3.1% of adult smokers in that country were e-vapor product users while 55% of smokers were aware of e-vapor products but had never tried them.

That is a huge potential market to go for of consumers who otherwise may be dissuaded by laws and regulations to give up smoking.

Driven by legal changes times are changing in the global tobacco market. e-vapor products may still look a little strange to us but they are here to staym and will become much more popular over time. As with any industry change, switched-on incumbents are in the best position to embrace and profit. This, and not the dull shorter-term earnings guidance, is the key message from Philip Morris International from Switzerland.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates PHILIP MORRIS INTERNATIONAL as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate PHILIP MORRIS INTERNATIONAL (PM) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its expanding profit margins and increase in stock price during the past year. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, weak operating cash flow and feeble growth in the company's earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for PHILIP MORRIS INTERNATIONAL is rather high; currently it is at 68.41%. Regardless of PM's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, PM's net profit margin of 27.10% compares favorably to the industry average.
  • PM, with its decline in revenue, underperformed when compared the industry average of 3.0%. Since the same quarter one year prior, revenues slightly dropped by 8.8%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • In its most recent trading session, PM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed against the S&P 500 and did not exceed that of the Tobacco industry. The net income has decreased by 11.8% when compared to the same quarter one year ago, dropping from $2,125.00 million to $1,875.00 million.
  • Net operating cash flow has decreased to $715.00 million or 47.54% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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