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On Jun 14, we retained our Neutral recommendation on Philip Morris International (PM - Analyst Report) as the company delivered soft results in the first quarter of fiscal 2013.

Currency headwinds, significant shipment declines in Philippines following a sudden tax hike and difficult year-ago comparisons hurt profits in the quarter despite decent top-line performance.

Why the Reiteration?

On Apr 22, 013, Philip Morris’ first-quarter 2013 earnings of $1.29 per share missed the Zacks Consensus Estimate by 4.4%.  Moreover, earnings increased only 3.2% year over year. However, revenues beat the Zacks revenue expectations and increased 3.2%, mainly driven by pricing which offset volume/mix headwinds.

Following the release of the first quarter results, the Zacks Consensus Estimate for fiscal 2013 went down 0.4% to $5.59 . Even for fiscal 2014, Zacks Consensus Estimate went down 0.3% to $6.22. Due to minor estimate revision, Philip Morris carries a Zacks Rank #3 (Hold).

Philip Morris has a strong brand portfolio of cigarettes, which helps it to command a leading market share in the tobacco industry. The company has maintained a market share in the range of 27%–28% from 2010-2012.

Marlboro leads the brands and has the largest market share among its close competitors. Marlboro’s market share in international cigarette market has been on the rise for several years and it rose from 9.1% in 2010 to 9.4% in 2012.

However, strict anti-smoking regulations by governments across the world, higher manufacturing costs and increased marketing costs are matters of concern.

Governments around the world are imposing restrictions on tobacco companies to reduce smoking in their respective countries, which is affecting cigarette consumption across the world. Governmental actions that outlaw the use of tobacco products, along with the diminishing social acceptance of smoking, will adversely impact the company’s volume in many markets, going ahead.

They are also imposing higher taxes, thus forcing companies to increase prices. Philip Morris has witnessed an increase in the overall average specific tax and excise tax ratio from 30.2% in Jan 2011 to 35.1% in Dec 2012.

Other Stocks to Consider

Philip Morris is not much ahead in the e-cigarette industry, while its competitors, Reynolds American Inc.’s (RAI - Analyst Report), Altria Group Inc. (MO - Analyst Report) and Lorrilard Inc. (LO - Analyst Report) have gone a long way in the industry of alternative tobacco products. In fact, they are innovating new varieties of e-cigarettes, which are presently gaining huge popularity among tobacco consumers in the U.S.

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