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Philip Morris' Q3 Earnings Beat, Revs Miss

PM MO RAI

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Philip Morris International Inc. (PM - Analyst Report) reported adjusted third-quarter 2013 earnings per share of $1.44, topping the Zacks Consensus Estimate of $1.43 by a penny and the prior-year quarter earnings by 4.3%.

Earnings were on the upswing owing to positive pricing and lower shares due to buyback. Excluding an unfavorable currency impact of 9 cents, earnings of $1.53 exceeded the prior-year quarter earnings by 10.9%.

Revenues and Margin

Net revenue went up marginally by 0.1% to $7.9 billion. However, it missed the Zacks Consensus Estimate of $8.0 billion by 1.3%. Excluding the impact of an unfavorable currency translation, net revenue increased roughly 1.6% from the prior-year quarter, mainly driven by favorable pricing.

During the quarter, net revenue in the European Union (EU) climbed 7.3% (up 1.8% excluding currency) from the prior-year quarter to $2.3 billion due to favorable pricing in Germany, France and Spain.

Net revenue in the Eastern Europe, the Middle East & Africa (EMEA) region stood at $2.3 billion, up 3.5% (up 3.9% excluding currency) from the prior-year quarter fuelled by positive pricing in Kazakhstan, Russia, Turkey and Ukraine.

Asia recorded net revenue of $2.5 billion, down 7.9% (down 0.8% excluding currency) from the prior-year quarter due to unfavorable volume/mix primarily in Philippines.

In Latin America and Canada, revenues went down 1.1% (up 2.9% excluding currency) to $818 million in the quarter due to favorable pricing in Argentina, Canada and Mexico.

Philip Morris' quarterly gross profit declined 0.5% from the prior-year quarter to $5.3 billion, mainly due to higher excise tax faced by the company during the quarter. Operating companies income (operating income before general corporate expenses and the amortization of intangibles) slipped 1.0% year over year (went up 3.3% excluding currency) to $3.7 billion during the quarter due to higher marketing, administration and research costs.

Volumes in Detail

Cigarette shipment volume went down 5.7% to 223.1 billion units due to sluggish tobacco industry performance.

During the quarter, shipments of the Marlboro branded cigarettes slipped 2.5% due to decline in volume in almost all the geographical regions. Shipment volume of the L&M brand slipped 2.1% during the quarter, mainly due to a drop in shipment Algeria, Egypt and Turkey. Parliament branded cigarettes recorded volume growth of 0.4% on the back of strong results in Turkey.

Chesterfield, Philip Morris, Lark and Bond Street brands witnessed a decline of shipment volume of 1.9%, 6.6%, 11.9% and 7.2%, respectively, due to lower industry volume.

Shipment volume of Other Tobacco Products (OTP) also declined 1.7% mainly due to a decline in Southern Africa.

Financial Update

Philip Morris exited the third quarter 2013 with cash and cash equivalents of $3.4 billion compared with $3.6 billion in the preceding quarter. Long-term debt stood at $21.9 billion in the third quarter of 2013 compared with $21.6 billion in the previous quarter.

During the quarter, Philip Morris spent $1.5 billion to repurchase 16.7 million shares. During the quarter, the company hiked the regular quarterly dividend by 10.6% to 94 cents.

Philip Morris purchased 20% interest of its Mexican tobacco business Grupo Carso for $703 million on Sep 30, 2013. The acquisition will be marginally accretive to the company’s earnings per share in the fourth quarter.

On Sep 30, Philip Morris inked a $625 million deal to takeover 49% stake in the United Arab Emirates (UAE) company — Arab Investors-TA (AITA). The deal will give Phillip Morris 25% stake in its distribution partner in Algeria – Société des Tabacs Algéro-Emiratie (STAEM) – which manufactures and distributes Marlboro and L&M cigarette brands in Algeria.

Guidance

Management expects its GAAP earnings to be in the range of $5.35 to $5.40 versus $5.17 in 2012. The guidance includes unfavorable special tax item of 1 cent per share, an anticipated fourth-quarter 2013 organizational restructuring charge of 3 cents per share and a cautious outlook regarding certain markets.

The company expects currency impact of 33 cents per share for 2013, higher than the 31 cents per share forecasted previously. Excluding the currency impact, the company expects its earnings to increase by approximately 10% from adjusted earnings of $5.22 in 2012.

Philip Morris carries a Zacks Rank #3 (Hold). Other diversified retailers worth considering include Reynolds American Inc. (RAI - Analyst Report) and Altria Group Inc. (MO - Analyst Report), which carry a Zacks Rank #2 (Buy).

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