Earnings are upon us and so far investors seem to be pleased, since markets had their best week in nearly a year, with all major indexes rising over 2.5%, despite some notable earnings misses from IBM, J.P Morgan Chase, and Google. Investors have apparently shaken off these misses but personally I feel like this rally will not last into next week, but that’s just one person’s opinion.
The earnings report that really caught my eye, though, this Friday was the 1st Quarter earnings report from Philip Morris International. Yes, I know you are probably upset that you are not going to get an interesting analysis of a brand new industry like Space Travel or 3D Printing but the earnings report from Philip Morris made me feel like I had to shed some more light on one of the oldest, and most controversial Industries in the U.S, the Tobacco industry.
It is no secret that the Tobacco industry is dying, new regulations and taxes have put a stake through Cigarette sales in the U. S, but what about the rest of the world? Outside the U.S and especially in the Far East cigarette sales and sales of other Tobacco products are booming, or are they?
Philip Morris International (PM) focuses on promoting its Marlboro brand and other Tobacco products in international markets (Altria (MO) is the company focusing on selling Marlboro Cigarettes and various Tobacco products in the U.S, the two companies were split in 2008). Philip Morris is also one of the largest Tobacco companies in the world and its Quarterly report is a good thing of which to measure the strength of the Tobacco Market around the world.
Fortunately for health enthusiasts and Cancer Societies around the world but unfortunately for shareholders and Executives of Tobacco companies, Philip Morris announced that 1st Quarter earnings were down 12% from the same time last year. Now I don’t have to tell anyone that that is a dismal performance but Philip Morris’s numbers might not actually show as bleak of a picture for Tobacco stocks.
At first glance though you cannot tell this at all, Philip Morris earned nearly $1.88 billion which is roughly $1.18 a share during the 1st Quarter of 2014(Although Wall Street was expecting a profit of $1.16 a share). This is way below last year’s numbers which were $2.13 billion in profit and $1.28 a share. Total revenue came in at $6.9 billion which was below expectations; most analysts were expecting revenue to be upwards of $7 billion.
This decline in revenue and sales was due to Cigarette shipments falling 4% to 196 billion (which is still a hell of a lot). The bad news doesn’t end there the tobacco giant reported that shipments fell nearly 7% in Eastern Europe, the Middle East, and Africa. Shipments also fell 5% in Latin America and Canada, 3% in the European Union and 2.5% in Asia (which is particularly bad because that is the largest Cigarette and Tobacco market in the world.)
Yet even as Revenues and cigarette volumes decline the Board of Philip Morris tried to put a positive spin on its earnings by saying that its market share increased in several key markets including Argentina, Canada, France, Germany, Poland, Russia, Spain and the United Kingdom. Increased market share in these regions is good but certainly not good enough to diminish falling cigarette volumes in every market around the world.
Of course it’s unfair to blame Philip Morris’s disappointing earnings solely on lower Cigarette volumes, the $132.1 billion company does all of its business in international markets, so its sales are directly affected by international events such as currency fluctuations and geopolitical tension. And if you have watched the news any time in the last 3 ½ months you know things have not been rosy on the international scene. The collapse of several emerging markets, the U.S dollar rising, a slowdown in China, the crisis in Ukraine and the tensions with Russia all cut into Philip Morris’s sales.
So it is difficult to judge the health of the international tobacco industry by Philip Morris’s 1st quarter earnings. But one thing is for sure if you are looking for some stability and a haven in the current volatile market Tobacco companies are the perfect place to look.
Tobacco companies like Philip Morris International, Altria, Reynolds American, Lorillard, and the Vector Group are all solid blue chips with high dividends insuring that they remain immune to the volatility affecting high flying momentum stocks.
But maybe you are not content with just dividends and safety, maybe you feel that with cigarette sales declining that tobacco companies are doomed to go out. Well to pacify those fears I am going to say that although cigarette sales are declining there is a new market emerging as a sub segment of the broader tobacco market and that is the market for alternative tobacco products such as electronic cigarettes and hookah pens. Also demand for more traditional tobacco products such as cigars is also growing. (If you interested in how to invest in these companies that do have a high opportunity to grow I am afraid you are going to have to wait until next week’s article.)
So to back track a little Philip Morris’s earnings for the 1st quarter certainly do not give much hope for the future of the cigarette market but neither does it spell its doom. Earnings from other tobacco companies due to be released soon, and these will shed light on the state of the tobacco industry in the U.S (just to issue a pre-mature warning, they will most likely be poor). If you are truly interested in judging how solid the tobacco industry is I would ignore this quarter’s earnings and instead focus on earnings from the 2nd quarter. This will be more accurate in determining the state of tobacco in international markets free of geopolitical tensions and trouble in the emerging markets.
If you are interested in investing or researching tobacco stocks I would focus on companies that are focused on promoting their cigarettes internationally and that are promoting alternative tobacco products in the U.S. I will release an article dealing with these specific companies next week.
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