Philip Morris International: Charging More for Smokes Will Give Earnings a Light

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Philip Morris International ( PM ), the world's leading international tobacco company outside the U.S. and China, will announce its Q2 2011 earnings on 21st July. PMI's product portfolio boast of eight of the world's top 15 brands, including Marlboro, the number one cigarette brand worldwide. Until a spin-off in 2008, Philip Morris International was an operating company of the Altria Group ( MO ). Philip Morris International competes with British American Tobacco ( BTI ), Japan Tobacco (PNK:JAPAF.PK) and Imperial Tobacco Group plc ( IMT ) in its various geographical segments. Below we look at some some key trends to watch for in its earnings report.

We have a $69.50 price estimate for Philip Morris International , which is just slightly ahead of the market price.

Pricing Focuses on Profitability

With a favorable geographical footprint and a strong product portfolio, Philip Morris International expects an average 3-5% organic growth in its annual revenues, net of excise taxes. Amid declining volume of cigarette sales in several key markets worldwide and rising excise taxation, PMI will continue to focus on its profitability. Accordingly, the profit margins will primarily be driven by higher pricing. PMI also recently concluded the 2008-10 cost savings program and expects to save $1.5 billion in costs annually going forward. This may significantly improve its bottom line.

Emerging Markets Driving Cigarette Sales Volume

PMI's cigarette sales volume will be mainly driven by growing Asian and Latin American markets of Indonesia, Philippines, Argentina and Brazil. Indonesia and South Korea are expected to offer PMI organic sales growth. Sales in the Philippines will continue to rise after the 2010 merger with Fortune Tobacco Corporation ( FTC ).

Post-merger PMI-FTC together control up to 90% of the expanding Philippine tobacco market with a greater presence on the low and mid-priced segments. Also looking forward, market share retention in the important Japanese market in the aftermath of the March 2011 earthquake and tsunami will be important.

Philip Morris International and British American Tobacco witnessed significant market share growth post March at the cost of Japan Tobacco which saw temporary supply disruptions.

However, sales volumes are expected to be offset by declining sales volume in Europe due to decreasing market volume, notably in Greece, Poland and Spain. Sales will also continue to be hit by the disruptive 2010 excise tax increase in Mexico as well as trends consumers trading down to lower priced cigarettes in Pakistan and possibly Russia.

See our complete analysis of Philip Morris International



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BTI , FTC , IMT , MO , PM

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