Philip Morris’ Earnings Will Show Asia Market Share Gains And Weaker Europe

Philip Morris International (NYSE:PM) is scheduled to announce its Q2 earnings on July 19. The company recently reduced its full-year earnings forecast to $5.10 -$5.20 per share, down from its April forecast of $5.20-$5.30 per share citing the strengthening of the U.S. dollar against other international currencies. The cigarette maker posted strong results in Q1 helped by a resilient performance in the European Union and strong performances in Asia and EEMA (East Europe, Middle East and Africa). PMI recently announced its decision to develop and launch a range of lower risk cigarettes by 2017 keeping in mind the changing market dynamics. ^[1] Here are a couple of trends to watch out for in the Q2 earnings.

We have a $94 price estimate for Philip Morris International, which is about 5% higher than the market price.

See our complete analysis of Philip Morris International

Asia Market Share to Rise

We estimate Philip Morris International’s Asia division contributes almost 45% to the company’s stock price. In 2011, Asia overtook the European Union as the highest profit generating region for the company. The tobacco giant has a strong presence in Indonesia, Japan, the Philippines and South Korea.

Indonesia, in particular, was one of the strongest performing regions for Philip Morris International where it witnessed a 3.5% jump in market share in Q1 2012 (y-o-y). The company has a strong portfolio in the country covering cigarettes in the premium, mid-price and low price segments. Indonesia accounts for almost one-fourth of total cigarette consumption in Asia (excluding China), so this is one of the most important growth regions for the company.

Furthermore, we expect PMI to gain market share in South Korea after the company slashed its Virginia Slims prices by 14% in the first quarter to better compete with the region’s dominant player KT&G.

EEMA Could Face Downward Revision

However, on the negative side, Philip Morris International’s growth prospects in EEMA could be hampered by a public smoking ban passed in Bulgaria effective June 1. Even the Russian lawmakers are contemplating passing a similar ban and setting a minimum retail price for all tobacco products in the country. Russia is the second biggest cigarette market in the world and Russians consumed about 375 billion cigarettes in 2011. If the law were to pass, we could see some a downward revision in our price estimate. (Read more: Philip Morris Readies For Potential Russian Public Smoking Ban)

We do not expect any significant change in the company’s performance in Europe compared to the previous quarters. The total market size is shrinking at a gradual rate due to a combination of factors such as high excise taxes, bad economy and more health conscious consumers. PMI’s market share has declined over the years but its lower-end brand Chesterfield has seen strong volume growth of late. This means the volume declines in popular brands such as Marlboro and L&M will be partially offset positively by Chesterfield’s volume growth. Overall, we expect the company’s performance in Europe to remain relatively stable as the excise taxes have been fairly muted in the region.

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1. Philip Morris To Introduce Lower-Risk Cigarettes By 2017, June 21, 2012, bloomberg.com [↩]