What is Holding Back Philip Morris International?
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Shares of Philip Morris International (NYSE: PM) haven't perform well in recent months and one of the reasons for this slowdown is the company's performance in the Euro Area. The third quarter financial reports of Philip Morris International will be published on October 18 and will shed some light on the company's financial performance. In preparation for the release of this quarterly report let’s examine what could further impede the company's growth for the rest of the year; let's also check the company's performance compared with its peers.
One of the main regions that hasn’t done well during the first half of 2012 was the European Union: according to the Philip Morris International financial reports for the second quarter (page 4) the net revenues of the company declined by 3.6% during the first half of 2012 compared to the first half of 2011 in the Euro Union. This region is the second largest in terms of revenues, after Asia, with nearly $4.3 billion in sales. This region is also the only one that contracted during the first half of the year. The depreciation of the Euro during the first half of 2012 was among the key factors for the decline in the company’s revenues in that region. During the third quarter, however, the Euro appreciated against the USD by 1.5%. This could suggest that the currency will have a positive effect in the third quarter financial reports. On the other hand, the ongoing recession in Europe and the debt crisis in Spain could suggest that not only the Euro currency might fall again during the last quarter of the year, but also the sales volume won't grow during the second half of 2012. Therefore, there might be a positive currency effect on EU revenues during the third quarter, but the general direction could still be downward.
Let’s examine how the company performed compared to the market and other tobacco companies.
PMI and S&P500
Philip Morris International stock has outperformed the S&P500 index; nonetheless, the company's stock is strongly linked with the S&P500 index: during September and October the linear correlation between their daily percent changes was 0.65, which could suggest, under certain assumptions that nearly 42% of the company’s stock movement may be due to the shifts of the stock market. During 2012 (UPD) the company’s stock rose by nearly 19.2% while the S&P500 rose by “only” 11.9%. In comparison, Altria Group (NYSE: MO) has performed much like PMI: during the year Altria’s stock rose by 19.2%. The chart below presents the developments of these two companies’ stocks and the S&P500 during the year (prices are normalized to the beginning of the January).
PMI and Dividend
The company continues to offer a very reasonable dividend yield of 3.69% which comes to $0.85 per share per quarter (the company announced back on September 12 it will raise the quarterly dividend to $0.85 per share). This means the annual dividend is at $3.40 per share, assuming the company will raise its dividend this year. In comparison, several other big tobacco companies offer higher yields: Altria offers a 5.32% yield based on $0.44 per share per quarter, and Reynolds American (NYSE: RAI) offers a 5.59% yield based on $0.59 per share per quarter. One factor that might explain the lower divided yield of Philip Morris International compared to the above-mentioned tobacco companies is that these companies mainly operate in the U.S –Altria solely operates in the U.S. This means, lower risk for these companies in regards to currency fluctuations.
PMI and Profitability
In regards to the company’s operating profitability it isn’t high compared to other tobacco companies. As seen in the chart below, the operating profitability of Philip Morris International is around 15-18 percent per quarter up to the second quarter of 2012. As a comparison, Reynolds operating profitability ranges between 25% and 33%; Altria's operating profitability ranges between 21% and 31%. Therefore, the higher profitability of Reynolds and Altria might be among the reason they offer higher dividend yields than Philip Morris International.
The bottom line is that Philip Morris International might not perform well for the rest of the year. During the third quarter there might be a positive currency effect on revenues, but as long as the economic situation in Europe doesn't improve, the revenues of the company might not rise and this could impede the company's stock growth.
For further Reading: Why Caterpillar isn’t pulling up? Just blame it on the Oil
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