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Philip Morris Earnings: Is the Worst Finally Ending?

Image source: Philip Morris.

International tobacco giant Philip Morris International (NYSE: PM) has struggled recently under the weight of the strong U.S. dollar and its negative impact on its sales and earnings. The declines that Philip Morris has seen in its top and bottom lines have troubled long-term investors, and coming into its second-quarter financial report on Tuesday, Philip Morris shareholders once again expect to see revenue and net income fall somewhat. Yet many hope that this quarter will be the low-water mark for the tobacco giant's fundamentals and that the company will bounce back in the near future. Let's take an early look at what Philip Morris International is likely to say and what it means for investors going forward.

Stats on Philip Morris International

Analyst EPS Estimate

$1.20

Change From Year-Ago EPS

(0.8%)

Revenue Estimate

$6.77 billion

Change From Year-Ago Revenue

(1.3%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Can Philip Morris International's earnings start rising again?

In recent months, investors have had mixed views about Philip Morris International's earnings prospects. They've reduced their second-quarter projections by $0.02 per share, but they've boosted their outlooks for the full 2016 and 2017 years, albeit by less than 1%. The stock has made only modest progress, gaining 3% since mid-April.

Philip Morris International's second-quarter results showed some of the pressures that the tobacco company has faced recently. Revenue was down 8% from the year-ago quarter, but if you adjust for currency impacts, then Philip Morris' sales would have climbed by more than 2%. Similarly, the 15% drop in net income would have turned into a penny-per-share rise using currency-neutral metrics. However, some other issues plagued the company, including a 1.4% drop in cigarette shipment volume and weakness throughout its geographical reach.

Investors have been hopeful that recent trends could finally put an end to the negative impact that the dollar's strength has had on Philip Morris. Last quarter, the company boosted its earnings guidance by $0.15 to between $4.40 to $4.50 per share, expecting that its foreign currency exposure would stop being as much of a headwind. The dollar's gains did start to reverse themselves , but the U.K. Brexit decision to leave the European Union sent the greenback soaring against the euro and British pound. That could therefore extend the dollar's rally and cause longer-term problems for Philip Morris.

Going beyond the dollar

Philip Morris has also had to deal with foreign governments seeking to impose restrictions on its ability to sell cigarettes, and many of the company's legal challenges to such laws haven't led to positive results. For instance, earlier in July, Philip Morris lost an arbitration case against the South American nation of Uruguay, which had imposed packaging laws that limited the company's ability to market its cigarettes freely. Philip Morris had argued that Uruguay's laws violated international trade treaties, but the arbitrator found that the laws didn't take away any of Philip Morris' property rights in its brand assets, pointing to the profits that Philip Morris continued to earn even after the regulations came into effect.

The big question for Philip Morris is whether traditional cigarette alternatives will start to play a more important role in its overall business. The iQOS heat-not-burn technology that Philip Morris has pushed hard has gotten a good reception in early rollouts, and a recent research report from the National Institute on Drug Abuse, the National Cancer Institute, and the Cancer Intervention and Surveillance Modeling Network said that e-cigarettes could cut smoking-related deaths by more than a fifth going forward. Some consumer advocates argue that users of alternatives like iQOS and e-cigarettes tend to smoke traditional cigarettes as well, compounding negative health effects. However, Philip Morris has invested a lot of resources in iQOS and hopes that regulators can come to grips with the product in a way that gives the company more latitude to market it.

In the Philip Morris earnings report, the dollar will play an important role, but investors also should look at fundamental performance in local-currency terms. With so strong a potential headwind from regulatory efforts, Philip Morris needs to stay ahead of the game and work hard to protect its pricing power and growth prospects.

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