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Phillip Morris's 3Q Mixed, Ups View

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Philip Morris International Inc. (PM - Free Report) reported adjusted third quarter 2012 earnings per share of $1.45, surpassing the prior-year quarter earnings by 5.8%, excluding currency. Earnings beat the Zacks Consensus Estimate of $1.39.

Earnings shot up on the back of higher revenues, favorable impact of lower shares outstanding and share-based payments.

Revenue in Detail

Excluding currency translation and acquisition, net revenue increased roughly 3.4% from the prior-year quarter, mainly driven by pricing, which offset volume/mix headwinds. During the quarter, Philip Morris’ net revenue declined 5.3% from the prior-year quarter to $7.9 billion, including an unfavorable currency impact of $731 million. Revenue also lagged the Zacks Consensus Estimate of $8.3 billion.

During the quarter, net revenue in the European Union (EU) slipped 15.2% from the prior-year quarter to $2.1 billion, including unfavorable currency.

Net revenue in the Eastern Europe, Middle East & Africa (EEMA) region stood at $2.2 billion, down 0.1% from the prior-year quarter. Asia recorded net revenue of $2.7 billion, down 1.4% from the prior-year quarter. The Latin American and Canada region reported a decrease of 2.4% to $827 million in the quarter.

Volumes in Detail

Cigarette shipment volume in the quarter went down 1.3% from the prior-year quarter to 236.5 billion units due to volume decline in European Union, Latin America and Canada region.

In the European region, cigarette shipments declined 8.1%, driven by a lower market share, particularly in southern Europe. In Latin America and Canada, cigarette shipment volumes declined 4.9% due to lower total market share in Argentina, Brazil, Colombia and Mexico.

Cigarette shipment volume in Asia increased 0.6% from the prior-year quarter, mainly in Indonesia, Thailand and Vietnam, offset by lower market share in Japan and Korea.

However, shipment volume in EEMA went up 3.0% on the back of improved market conditions in Egypt and favorable distributor inventory movements and higher market share in Russia.

During the quarter, shipments of the Marlboro brand of cigarettes went down by 2.3%, while that of L&M brand went up 3.4% during the quarter. Parliament and Bond Street brands recorded volume growth of 10.7% and 3.4%, respectively. Chesterfield, Lark and Philip Morris brands witnessed declines of 6.0%, 16.0% and 4.0%, respectively, in the quarter.

Philip Morris’ quarterly gross profit slipped 3.2% from the prior-year quarter to $5.3 billion, while operating income declined 1.5% y/y to $3.6 billion during the quarter.

Financial Analysis

Philip Morris exited the third quarter 2012 with cash and cash equivalents of $4.8 billion compared with $2.6 billion in the sequentially preceding quarter. Long-term debt stood at $17.5 billion in the third quarter compared with $14.8 billion in the previous quarter.

Share Buyback and Dividend Update

During the quarter, Philip Morris spent $1.5 billion to repurchase 16.7 million shares. After completing a three-year share buyback program worth $12 billion in July 2012, the company announced a new share buyback program of $18.0 billion in August 2012.

The company increased its quarterly dividend by 10.4% during the quarter to 85 cents from 77 cents, representing an annualized rate of $3.40 per common share.


Concurrent with the earnings release, the company forecasts earnings in the range of $5.12 to $5.18 per share, representing a growth rate of approximately 11% to 12% versus adjusted earnings of $4.88 per share in 2011.

This excludes the unfavorable impact of currency, net tax expense of 5 cents per share and year-to-date asset impairment and exit costs of 2 cents per share. This guidance also excludes the impact of any potential future acquisitions, unanticipated asset impairment and exit cost charges.

The company’s major competitors are Altria Group Inc. (MO - Free Report) and Reynolds American Inc. . Currently, we have a Neutral recommendation on the stock. Further, Philip Morris holds a Zacks #2 Rank (short-term Buy rating).

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