Here's why Philip Morris' Management Is Excited About the Future

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At first glance, Philip Morris' first-quarter results appeared disappointing. However, Philip Morris' management remains upbeat about the company's future and the underlying business appears strong.

This quote from management sums up Philip Morris' outlook:

...our guidance reflects a full-year growth rate of approximately 6% to 8% in an adjusted diluted earnings per share excluding currency and the restructuring charge. Our overall business is in good shape though the unfavorable volume mix remains a key challenge due to cigarette industry volume trends...

Digging into the numbers
Looking at Philip Morris' headline first-quarter figures, the volume of cigarettes sold by the company declined 4.4%, although management attributed that decline mainly to adverse inventory movements.


Excluding these movements, underlying volume only declined 2%. This was better than the wider industry, which reported an average volume decline of 4%.

What's more, inventory movements distorted Philip Morris' headline revenue figures, net revenue and adjusted operating income -- with currency excluded, these declined by 1.6% and 3.1%, respectively.

Nevertheless, excluding these distortions as well as the changes made to Philip Morris' business in Egypt undertaken as part of a company-wide restructuring, net revenue and operating income remained essentially stable. Adjusted diluted earnings per share increased by 4.7%, excluding currency.

Positive trends
Unfortunately, a number of other factors affected Philip Morris' results which were out of the company's control, but if we strip them out some positive trends emerge.

For example, the Japanese government increased the country's consumption tax, a tax paid on all goods and services, from 5% to 8% on April 1. According to Philip Morris' management, this tax hike will lead to an acceleration in the rate of decline for cigarette-industry volume across Japan, from last year's level of 2% to between 3% and 3.5%.

However, Philip Morris was able to increase the price of its cigarettes inline with the tax increase. This should offset declining volumes to some extent.

Meanwhile, over in Russia, the volume of cigarettes sold across the industry during the quarter declined 6.7%. Philip Morris' management forecast a full-year volume decline of 9% to 11%.

However, once again Philip Morris managed to benefit from this by hiking prices and the company's Russian profit for the quarter grew at a double-digit rate, excluding currency. This growth also excluded the contribution of the company's 20% shareholding in Megapolis, a Russian cigarette distributor.

During the quarter, Philip Morris' Marlboro brand continued to grab market share. It reached a 9.2% international market share during the first quarter.

Looking to the future
Philip Morris' recent set of results also shed some light on the company's reduced-risk initiative.

Philip Morris is currently developing several reduced-risk products based around a hybrid e-cig/traditional cigarette model. The company is undertaking eight clinical trials this year and is planning trial-market tests toward the end of the year. It has scheduled the commercial launch for 2015.

At present, the company is ramping up its development spending and plans to invest around $100 million here. This is not counting the $800 million construction of a 30 billion unit HeatStick tobacco stick factory in Bologna, Italy, which the company plans to complete by 2016.

International growth
These results and management's comments show that despite some headwinds, Philip Morris and the international cigarette market are still stronger than the domestic market within the U.S. 

Philip Morris' U.S. peer, Altria  reported first-quarter results that were stronger on a headline basis, but after stripping out foreign exchange and inventory movements, the results were weaker. 

For example, during the quarter the volume of cigarettes sold by Atria declined 2.5%, 25% more than Philip Morris' decline excluding inventory movements. That being said, Altria's revenue and income increased faster than those of Philip Morris and the company continued to increase the prices of its tobacco products. During the first quarter, Altria's EPS ticked up by 5.6% and smokeable revenues net of excise taxes increased by 1.2%; smokeable operating income rose by 6.4%. 

Foolish summary
Despite foreign exchange headwinds and rising excise taxes, Philip Morris continues to grow and churn out cash to return to investors. Big tobacco's case for an investment still exists. 

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The article Here's why Philip Morris' Management Is Excited About the Future originally appeared on Fool.com.

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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