Philip Morris: Market Is Impressed, I Am Not – Philip Morris International Inc. (NYSE: PM)

On Thursday, October 18, 2018, Tobacco International Philip Morris International (PM) announced its third-quarter 2018 earnings results. Overall, these results beat the expectations of analysts on both the top- and bottom-lines. The market was pleased with these results too, sending both parties Thursday and Friday. While there were some earnings in the company's earnings report, we are still suffering from some of the same problems. The most notable of these is declining worldwide demand for tobacco products. This may be the case for the company, but it may not be more effective with its products.

As my long-time readers are well aware, it is my practice to share the results of a company's earnings report before delving into an analysis of its results. This is due to a framework for providing a framework for the resultant analysis. Therefore, here are the highlights from Philip Morris International's third-quarter 2018 earnings results:

• Philip Morris International reported total net income of $ 7.5 billion in the third quarter of 2018. This represents a 0.4% increase over the prior-year quarter.
• The company reported operating income of $ 3.2 billion in the quarter, which represents a quarterly increase of 2.2%.
• Philip Morris International reported a total of 203.7 billion cigarettes, which was a decrease of 2.1% over the prior-year quarter.
• The company maintains its full year 2018 guidance $ 4.97 to $ 5.02 in EPS. This would be a 28% -29% increase year-over-year, should the company manage to achieve it. The company also kept its dividend steady at $ 1.14 per common share.
• Philip Morris International reported $ 1.44 in the third quarter of the year. This represents a 13.4% increase over the $ 1.27 that the company had in the prior-year quarter.

The first thing that caught the eye of the world is that the first thing that has been caught up in the eyes of the reader is that the company's year-over-year revenue growth was relatively meager. It is important to keep in mind though that Philip Morris International conducts business in many different countries. While this is a good thing, it has a negative impact on a company, which we saw in the latest quarter. Philip Morris International reports its results in U.S. dollars but its customers actually pay for their respective local currencies. As I have discussed in various previous articles, the U.S. dollar has been appreciating against most of the world's currencies over the past year. This resulted in the fact that the company actually converted to U.S. dollars for reporting purposes. If we adjust for this, the company would have had a top-line growth of 3.3% year over year. Admittedly, this is not particularly impressive growth, but it is better than what is actually reported.

In the article, I made the case that the steady decline of cigarette use would be a problem for the company going forward. We have seen a total of 195.1 billion units, which was a 1.7% decline over the third quarter of 2017. There were three areas that saw notable declines: Eastern Europe (including Russia), East Asia & Australia (most notably Japan and Korea) and Latin America & Canada. We can see these volumes clearly here:

The primary reasons for the change of perception are the general perception towards smoking and the implementation of government policies, such as excise taxes, which are meant to reduce the consumption of cigarettes. This second point in particular makes a lot of sense due to the fact that it is necessary to reduce the burden of disease. It does not seem likely that the change will change in the future.

For this reason, Philip Morris has been pushing the adoption of its product, which is essentially an electronic cigarette that heats the cartridges of cigarettes. Unfortunately, Philip Morris International hoped. The product performed especially badly in the third quarter of 2018 as the company only shipped 8.7 billion cartridges, which would be an 11.0% year-over-year decline. However, this article is not necessarily available at the local level. Thus, customers would buy tobacco cartridges but the distributions did not order more from the company. This article is most prominent in Japan, where distributors are expected to reduce their inventories by about one billion in the full year of the year. Japan will clearly be doing so. Unfortunately, Philip Morris did not say that it was a total amount of 6.7 billion units, but it was not exactly the same thing. cigarettes and IQOS cartridges could have been made up by a small amount of money, so we can assume that IQOS cartridge shipments would have been up by a noticeable amount.

As I mentioned in the introduction, the marketplace is excited about these results and the price of the shares on both Thursday and Friday. This may make some investors wonder if they should buy into the company now following these results. I am not sure that this is a good idea based on the stock's valuation. One metric that we can use to value is the price-to-earnings growth ratio, which is essentially an annual rate-to-earnings ratio that takes a company's forward growth rate. As a general rule, this article is related to its forward growth and is compared to other languages. According to Zacks Investment Research, Philip Morris is expected to grow at 8.65% annual rate over the next three to five years. This gives the stock a PEG ratio of 2.06 at its current level. Thus, the stock appears to be overvalued by this metric at its present level.

In conclusion, the company did beat the expectations of analysts. However, I do not seem to be in a position to weaken business. While IQOS is making some progress towards offsetting this decline, it has not yet reached Philip Morris International's business. The stock also seems a bit pricey relative to its growth prospects, which may also prove problematic. Overall, I can not recommend buying the shares today.

Disclosure: I / we have no positions in any stocks and 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with this article.