Philip Morris Tops, Ups Guidance

Earlier today, cigarette manufacturer and marketer Philip Morris International Inc. (PM - Analyst Report) reported better-than-expected third-quarter results, benefiting from price increases in some markets. Earnings per share came in at 93 cents, 3 cents above the Zacks Consensus Estimate.

On a year-over-year basis, Philip Morris’ earnings per share was flat (excluding a tax benefit of 8 cents in 2008), while net revenues declined 4.6% to $16.6 billion, attributable to unfavorable currency translations and weak results in the European Union (EU), Eastern Europe and Middle East & Africa (EEMA) markets.

Revenue, Volumes & Margins

On an organic basis (excluding currency and acquisitions), revenues increased 4.1% driven by favorable pricing. Cigarette volume was down almost 3% year-over-year to 219.3 billion units, mainly because of declines in EU, EEMA and Asia. The first two regions were adversely affected by the economic crisis (especially in Spain and Ukraine) and unfavorable comparisons due to a strong third quarter in 2008, while Asian volumes suffered from unfavorable trade inventory movements in Pakistan. This was partly offset by strength in Latin America & Canada, buoyed by the acquisition of Rothmans Inc.

Organic cigarette shipment volume declined 4.0%. Marlboro volumes declined 4.3% due to the cigarette market contracting in the EU and EEMA, primarily from the effects of the economic crisis in Spain and the weakening of the premium segment in Russia and Ukraine. Nevertheless, Philip Morris gained market share in Algeria, Argentina, Belgium, Brazil, Bulgaria, Canada, the Dominican Republic, Egypt, Hungary, Korea, Mexico, Pakistan, the Philippines, Portugal, Russia, Slovakia, Switzerland, Turkey and the Ukraine.

The gross margin remained flat at 25.8%, while the operating margin expanded 62 basis points to 17.5%. Interest expense increased 220% from $69 million to $221 million due to a higher average debt level.

Dividends & Share Buyback

Recently, Philip Morris announced a 7.4% increase in its quarterly dividend to 58 cents per share ($2.32 per share annualized). During the quarter, the company repurchased 31.5 million shares for $1.5 billion.

Guidance

Concurrent with the earnings release, management raised guidance for 2009. Annual earnings are expected to be in the range of $3.20 to $3.25 per diluted share versus previous guidance of $3.10 to $3.20. Guidance includes an unfavorable currency impact of 52 cents per share.

Excluding currency, diluted earnings per share are expected to increase by approximately 12% to 14%, including a pre-tax charge of $135 million ($93 million after-tax or $0.04 per share) related to the Colombian Investment and Cooperation Agreement and excluding the impact of any potential future acquisitions, asset impairment and exit costs, and any other unusual events.