Report
Philip Gorham
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Morningstar | PMI Delivers Another Strong Quarter; We Remain Bullish

Philip Morris International continued its strong start to the year by beating our second-quarter earnings estimates on volumes and revenue. Adjusted organic sales growth of 4.4% was better than our forecast, with pricing of almost 7%, although after adjusting for the timing of certain price increases, the underlying price/mix run rate is around 5%. Nevertheless, this was a strong quarter which prompted PMI to increase its guidance for the year and increase its investment behind iQOS. We will raise our near-term assumptions but this is unlikely to materially impact our $102 fair value estimate. The strong first half of the year should be encouraging to investors worried about a global acceleration in the consumption decline rate. Undoubtedly the business model of Big Tobacco is evolving, and competition is increasing, but PMI is leading the way in heated tobacco, the category that we think has the best long-term potential, and upside remains to our fair value estimate, particularly because we do not believe the imminent launch of iQOS in the U.S. is fully priced in.

The upside to our estimates primarily came from the EU, where the steady uptake of iQOS is helping to offset a cigarette volume decline running at around 3% to 4% per year. Second-quarter total EU volumes ticked up 0.5%, although this continues to be somewhat supported by the passing of lower taxes on non-combustible products in Italy. Eastern Europe was a similar story, and the 23% sequential growth in HEETS volumes in Russia was pleasing and slightly above our expectations.

The strong top line performance trickled down to the bottom line, as the top line drivers helped the adjusted EBIT margin to expand by almost 170 basis points. The strong first half has given management headroom to both raise full-year guidance and make $100 million of incremental investments in iQOS, which should support continued adoption. It now expects full-year EPS growth of at least 9%.
Underlying
Philip Morris International Inc.

Philip Morris International is a holding company. Through its subsidiaries, the company is a tobacco company engaged in the manufacture and sale of cigarettes, smoke-free products and associated electronic devices and accessories, and other nicotine-containing products in markets outside the United States. The company's portfolio comprises international and local brands including Marlboro, which is complemented in the premium-price category by Parliament. The company's other international cigarette brands are Bond Street, Chesterfield, L&M, Lark and Philip Morris. The company also owns various local cigarette brands, such as Dji Sam Soe, Sampoerna A and Sampoerna U in Indonesia, and Fortune and Jackpot in the Philippines.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Philip Gorham

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