Philip Morris: Earnings Beat, Sales Lag in Q3

Philip Morris International (PM) reported mixed third-quarter results before the markets opened. The company’s revenues benefitted from higher pricing and mix. Also, stellar growth in heated tobacco units supported the top line. However, the revenues fell short of analysts’ consensus estimate, which reflected lower cigarette volumes.

Cigarette shipment volumes fell 5.9%, which reflected declines in Indonesia, Saudi Arabia, Turkey, Pakistan, Canada, Mexico, and the Philippines. Lower cigarette shipment volumes accelerated in the third quarter. In the previous quarter, cigarette shipment volumes fell 3.6%.

Marlboro’s shipment volumes fell marginally, which reflected weakness in the GCC region. Notably, Marlboro is Philip Morris’s largest brand. Meanwhile, shipment volumes of Chesterfield and its namesake brand fell 5.2% and 1.7%, respectively. However, L&M’s volumes improved.

In contrast, heated tobacco shipment volumes rose 84.8%, which reflected strong growth in Eastern Europe and the European Union.

The company’s adjusted operating margin fell. The benefits from the favorable pricing and mix were more than offset by increased investments in reduced-risk products. Meanwhile, negative currency rates remained a drag.

Philip Morris’s adjusted EPS fell on a YoY (year-over-year) basis, which reflected lower margins. However, the EPS beat analysts’ consensus estimate. Management stood by its earlier guidance and expects the adjusted EPS to be $5.14 in 2019. However, the company’s adjusted EPS guidance is well below analysts’ expectations of $5.21.

Philip Morris posted revenues of $7.64 billion—up 1.8% YoY. On a constant-currency basis, the revenues increased 3.4%. Higher pricing in Germany, Indonesia, the Philippines, Mexico, and Turkey supported the growth. Also, higher shipment volumes of heated tobacco units supported the sales.

Despite the growth, the revenues were below analysts’ consensus estimate of $7.67 billion, which reflected lower cigarette shipment volumes.

Philip Morris’s adjusted operating margin fell by 40 basis points to 41.7%. The favorable pricing and mix and lower manufacturing costs supported the operating margin in the third quarter. However, higher marketing, administration, and research costs related to reduced-risk products remained a drag. Currency volatility had a negative impact on the profit margin.

Philip Morris posted an adjusted EPS of $1.43, which fell 0.7% YoY due to lower margins. However, the company’s EPS beat analysts’ consensus estimate of $1.36 by a wide margin.

In comparison, analysts expect Altria’s (MO) revenue growth to be lower than Philip Morris’s revenue growth in the third quarter. Analysts expect Altria to post revenues of $5.34 billion—up about 1% YoY. Despite the low sales growth rate, Altria could outperform Philip Morris with its EPS growth in the third quarter. Analysts expect Altria’s adjusted EPS to be $1.15—up about 6% YoY. A lower share count will likely support the bottom line.

Philip Morris shares rose more than 2% in the pre-market session.