Philip Morris (PM, Financial) reported a 1.4% sales decline to $16.6 billion but 3.9% profit growth to $1.59 billion in the first quarter –Â a 9.6% profit margin vs. 9.1% in the year-ago quarter.
In review, provision for income taxes declined by $541 million from $630 million last year, which could have helped improve Philip Morris’ bottom line for the quarter.
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“Our results were in line with our previously communicated expectation of a relatively weak first quarter, due to lower cigarette volume – primarily related to low-price brands in specific markets where the impact on our profitability was limited – and certain timing factors.
"We are fully on track to deliver our full-year EPS guidance, driven by robust pricing and accelerating IQOS volume growth. We anticipate a combined cigarette and heated tobacco unit volume decline of 3% to 4% for the full year.
“It is extremely encouraging that already today, despite persistent capacity constraints, 1.8 million consumers have effectively stopped smoking and have switched to our heat-not-burn alternative, IQOS." –Â André Calantzopoulos, CEO
Outlook
For fiscal 2017, Philip Morris sees its diluted earnings per share (EPS) to a range of $4.84 to $4.99, at prevailing exchange rates, versus $4.48 in 2016 (1).
Shares of Philip Morris reacted -0.33% post earnings release.
Total returns
Philip Morris outperformed the broader Standard & Poor's 500 index several times this year with 24% total gains vs. 5.5% (Morningstar data). The company, meanwhile, lagged the index’s returns in the past five years with 8.8% vs. 13.7%.
Valuations
Philip Morris is currently overvalued compared to its peers. According to GuruFocus data, Philip Morris had a trailing price-earnings (P/E) ratio of 24.9 times vs. the industry median of 17.4 times and a price-sales (P/S) ratio of 6.6 times vs. 3 times.
Philip Morris had a trailing dividend yield of 3.72% with a 92% payout ratio.
Using 2017 sales and EPS averages –Â excluding excise taxes (billions) –Â indicated multiples of 6 times and 23 times.
(Annual Report)
Philip Morris
According to filings, Philip Morris International Inc. (or Philip Morris in this article) is a Virginia holding company incorporated in 1987. The company’s subsidiaries and affiliates and its corresponding licensees are engaged in the manufacture and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside the U.S.
Philip Morris conducts businesses in 180 markets, and in many of these markets it holds the No. 1 or No. 2 market share position.
Marlboro, the world’s best-selling international cigarette, accounted for approximately 35% of Philip Morris’ total 2016 shipment volume. Marlboro forms a major part of Philip Morris’ premium-price category by Parliament and Virginia Slims.
Philip Morris’ midprice brands include L&M, Lark, Merit, Muratti and Philip Morris. Other leading international brands include Bond Street, Chesterfield, Next and Red & White (2).
Philip Morris divided its operations into four geographic regions, which constituted its segments. These are the European Union, Eastern Europe, Middle East & Africa, Asia and Latin America & Canada.
(Annual Report)
European Union
According to filings, the European Union region is headquartered in Lausanne, Switzerland, and covers all the European Union countries and also comprises Switzerland, Norway and Iceland, which are linked to the European Union through trade agreements.
In the first quarter, sales in the European Union declined by 6.6% to $1.74 billion or 28.7% total (unadjusted) Philip Morris sales; the segment also delivered an operating companies* margin of 44.4% vs. 48.6% in first-quarter 2016.
*operating companies margin excludes amortization of intangibles, general corporate expenses, and equity (income)/loss in unconsolidated subsidiaries, net.
(Annual Report)
Eastern Europe, Middle East & Africa
The Eastern Europe, Middle East & Africa region is also headquartered in Lausanne and includes Eastern Europe, certain Balkan countries, Turkey, the Middle East and Africa and Philip Morris’ international duty-free business.
In the first quarter, sales in the area fell by 7.8% to $1.48 billion or 24.4% of total unadjusted company sales and delivered an operating companies margin of 46.7% (most profitable) vs. 39.5% in first-quarter 2016.
(Annual Report)
Asia
The Asia region is headquartered in Hong Kong and covers all other Asian markets as well as Australia, New Zealand and the Pacific Islands.
In the first quarter, sales in Asia impressively rose by 13.9% to $2.24 billion or 37% (largest) total unadjusted company sales and delivered an operating companies income margin of 38% vs. 39.5% in first-quarter 2016.
According to filings, about three percentage points of the 13.9% increase was brought by favorable currency while the remaining improvement in sales was brought by favorable pricing variance driven principally by Australia, Indonesia and the Philippines*.
Read complete First Quarter 2017 Earnings Release for full explanation.
(Annual Report)
Latin America & Canada
The Latin America & Canada region is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.
In the first quarter, sales in the segment fell by 6.8% to $606 million, and margin also dropped to 29.2% from 35.2% in first-quarter 2016.
Total net revenue and net income
(Annual report and earnings release)
In the past three years, Philip Morris had an average sales decline of 5.09%, profits declined at an average of 6.7%, and profit margin average was at 25.6%.
Cash, debt and book value
As of March, Philip Morris had $5.1 billion in cash and cash equivalents and $31.35 billion in debt having a shareholder deficit* of $10.6 billion. In comparison, the company had $29.79 billion in debt and shareholder deficit of $10.89 billion the year period.
*shareholder deficit or negative shareholder equity should serve as red flags to look much closer (company) before investing (Investopedia).
Of Philip Morris’ $36.6 billion assets, 27%, or $10 billion, were identified as blue-sky elements –Â goodwill and intangibles.
Net debt to adjusted EBITDA
The net debt to earnings before interest depreciation and amortization (EBITDA) ratio is a measurement of leverage (Investopedia). In the first quarter, leverage using this ratio indicated 2.28 times compared to 2.43 times in first-quarter 2016.
Cash flow
(Earnings release)
(Annual Report)
(Annual Report)
In the first quarter, Philip Morris grew its operating cash flow by 82.5% to $843 million.
On average, Philip Morris allocated 111% of its free cash flow in dividends and share repurchases in the past three fiscal years. Philip Morris also has taken less debt in recent years.
Conclusion
Philip Morris has been able to support its operations including rewarding its shareholders requiring not so much aggressive debt intake regardless of declining business growth.
Nonetheless, the company had an unfavorable balance sheet.
(Philip Morris shares and P/S ratio, GuruFocus)
Fifteen analysts had an average price target of $115.53 a share –Â 4.8% upside from the share price of $110.19 (at the time of writing).
In summary, Philip Morris would be a pass given the current revenue growth struggles and balance sheet condition.
Notes
(1) Earnings release
Philip Morris: This forecast assumes net revenue growth, excluding excise taxes, in excess of the company's current annual growth target range of 4% to 6%, excluding currency and acquisitions.
This forecast does not include any share repurchases in 2017.
This forecast excludes the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future changes in currency exchange rates, and any unusual events. Factors described in the Forward Looking and Cautionary Statements section of this release represent continuing risks to these projections.
(2) Annual Report:
Philip Morris also owns a number of important local cigarette brands, such as Dji Sam Soe, Sampoerna and U Mild in Indonesia; Champion, Fortune and Jackpot in the Philippines; Apollo-Soyuz and Optima in Russia; Morven Gold in Pakistan; Boston in Colombia; Belmont, Canadian Classics and Number 7 in Canada; f6 in Germany; Delicados in Mexico; Assos in Greece, and Petra in the Czech Republic and Slovakia.
Disclosure: I do not have shares in any of the companies mentioned.
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