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Why Philip Morris’s Net Margins Expanded in 1Q17

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1Q17 margins

In 1Q17, Philip Morris (PM) posted gross, EBIT (earnings before interest, and tax), and net margins of 64.1%, 39.5%, and 26.2%, respectively. Comparatively, in 1Q16, the company posted gross, EBIT, and net margins of 65.5%, 40.7%, and 25.2%, respectively.

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Factors behind the expansion of PM’s 1Q17 net margins

In 1Q17, the cost of sales rose from 34.5% in 1Q16 to 35.9% of total revenues due to increased investments in manufacturing facilities for iQOS and HeatSticks. However, SG&A (selling, general, and administrative), interest, and income tax expenses fell, boosting Philip Morris’s net margins. SG&A expenses fell from 24.6% of the total revenue to 24.2% while interest expenses fell from 4.1% to 3.6%.

Peer comparisons

By comparison, analysts are expecting Altria Group (MO) to post gross, EBIT, and net margins of 59.7%, 48.9%, and 31%, respectively. Reynolds American (RAI) is expected to post gross, EBIT, and net margins of 61.1%, 47.9%, and 27.7%, respectively.

Outlook

In the next four quarters, analysts are expecting Philip Morris to post gross, EBIT, and net margins of 64.6%, 40.4%, and 26.2%, respectively. Comparatively, in 1Q16, the company posted gross, EBIT, and net margins of 64.5%, 40.3%, and 26.4%, respectively.

Next, we’ll look at Philip Morris’s 1Q17 earnings.

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