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Philip Morris International: iQOS Introduction A Game Changer For Growth

Summary

Philip Morris International has struggled in recent years as a strong dollar and increasing regulation has hindered growth.

The initial roll-out for its new reduced risk product, iQOS, has gone exceedingly well, and sets up the company for increased market share and revenues.

Philip Morris's 4% yield and future growth prospects make it one of the more attractive dividend growth opportunities in the market.

Phillip Morris (NYSE:<a href='http://seekingalpha.com/symbol/PM' title='Philip Morris International Inc.'>PM</a>) Logo

Following its spin-off from Altria Group (NYSE:MO) in 2008, Philip Morris International () has produced an attractive yield and consistent dividend growth that has made it a favorite holding of dividend growth investors.

Unfortunately, the company has struggled to grow earnings in recent years in the face of a strong dollar, declining volumes, and legislative efforts by foreign governments to increase taxes and reduce the power of its brand name. The currency issues are outside of its control, but I believe it has a silver bullet to counter the other headwinds, and this makes the company a buy, despite its apparent overvaluation.

Company Background

Philip Morris International "PMI" began trading as a stand alone company in March of 2008 when it was spun off to shareholders of Altria Group. This move allowed Altria to focus on U.S. operations while creating a standalone company in Philip Morris that was the world's leading international tobacco company and 4th largest global consumer packaged goods company. Since then, PMI has continued to grow its international operations through joint ventures and brand acquisitions and, in 2012, it became the most profitable publicly traded tobacco company in the world.

It has done this on the back of Marlboro, the most popular cigarette brand in the world, which has higher volumes than the next two largest brands combined. Additionally, PMI also owns the L&M brand (#3 globally), as well as 4 other top 15 international brands: Bond Street, Parliament, Philip Morris and Chesterfield.

PMI sells its products in approximately 180 countries in the European Union, Eastern Europe, the Middle East, Africa, Asia, Latin America, and Canada.

Philip Morris Geographical Markets

Source: 2/17/2016 CAGNY presentation

Unique Structure Leads To Currency Exchange Volatility

Philip Morris is headquartered in New York, NY, which makes it a unique situation in that it is a U.S. based company that derives all of its revenues from international sales. As a result, it is highly exposed to fluctuations in the dollar. This had a fairly significant impact in 2015, as unfavorable currency impacted reported earnings by $1.20.

PMI released guidance along with that earnings report, and the company expected EPS in the range of $4.25-$4.35 for 2016 based on the prevailing exchange rates at the time. Fortunately, the currency situation has improved since the beginning of the year, as the dollar has weakened materially against both the Japanese yen and the euro.

US Dollar to Euro Exchange Rate Chart

This currency shift should have a positive impact on reported earnings for Q1, and analyst estimates are just beginning to reflect that. Looking at both the current quarter and current year, the EPS estimates have begun to creep up over the last 30 days, and the consensus for 2016 earnings is now $0.14 higher than the mid-point of company guidance.

Phillip Morris Analyst Estimates

Should the current trend in a weaker dollar continue, I expect these estimates to continue moving higher in the coming weeks.

iQOS: The New Standard For Alternative Products

With currency concerns abated...


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