Image Shown: An overview of Philip Morris International Inc’s guidance for 2021. Image Source: Philip Morris International Inc – Third Quarter of 2021 IR Earnings Presentation
By Callum Turcan
On October 19, Philip Morris International Inc (PM) reported third quarter 2021 earnings that beat both consensus top- and bottom-line estimates. The firm narrowed its reported diluted EPS estimate for 2021 in conjunction with the report, which saw the midpoint of its guidance move marginally lower. However, Philip Morris International’s non-GAAP currency-neutral adjusted diluted EPS forecast for 2021 now calls for 13%-14% growth over 2020 levels, which is an improvement from its previous guidance calling for 12%-14% growth.
In the graphic at the top of this article, Philip Morris International provides an overview of its guidance for 2021 with an eye towards strong forecasted non-GAAP adjusted revenue growth and impressive forecasted non-GAAP adjusted operating margin expansion. We liked what we saw in Philip Morris International’s latest earnings update and continue to view its income generation potential quite favorably.
Earnings Update
In the third quarter of 2021, Philip Morris International reported that its GAAP revenues grew by 9% year-over-year, its GAAP gross profit grew by 10% year-over-year, and its GAAP operating income grew by 6% year-over-year. The company’s popular IQOS heated tobacco unit (‘HTU’) offering continued to sell well, upside that was complemented by the ample pricing strength at its traditional cigarette business (includes the Marlboro brand, excluding sales in markets in the US and China). Growth in the shipment volumes of its HTU offerings offset declines in the shipment volumes of its traditional cigarettes, resulting in company-wide shipment volume growth of 2% on a year-over-year basis last quarter.
During the tobacco giant’s latest earnings call, management noted that supply chain hurdles weighed negatively on the sales of the firm’s IQOS offering, with an eye towards the semiconductor shortage. Management noted that “at this stage, semiconductor supply forecasting remains volatile so we assume the tight supply situation will persist into the first half of 2022” and that the firm is doing what it can to optimize supplies. Looking farther ahead, management had favorably things to say regarding Philip Morris International’s cost structure enhancement initiatives (emphasis added, moderately edited):
“Our significant effort on manufacturing and supply chain efficiencies are also bearing fruits with around $450 million of gross productivity savings benefit. This was accompanied by robust SG&A efficiencies with our adjusted year-to-date marketing, administration, and research costs, 40 basis points lower as a percentage of adjusted net revenue on an organic basis.
This reflects the ongoing digitalization and simplification of our business processes including our IQOS commercial engine and more efficient ways of working partly offset by increased commercial investment in Q3. With SG&A saving[s] of more than $200 million before inflation and reinvestment, this mean[s] we have generated over $650 million in overall growth efficiencies year-to-date. This is strong progress toward the combined target of $2 billion for… 2023 [off of 2020 levels as noted back during the company’s 2021 Investor Day Event].” — Emmanuel Babeau, CFO of Philip Morris International
We appreciate that Philip Morris International is steadily improving its cost structure, though note that some of these savings are being directed towards R&D investments as the firm aims to grow its non-nicotine sales over the coming years. Recent acquisitions are supporting Philip Morris International’s efforts on this front.
In the third quarter of 2021, Philip Morris International acquired OtiTopic and Fertin Pharma, and the firm is in the process of completing its acquisition of Vectura Group now that it owns a controlling stake in the company (~97% as of the end of September 2021). These deals are expected to assist Philip Morris International in its bid to develop a sizable pharmaceutical and consumer health business, something we covered in detail in our September 2021 article Update on High-Yielding Philip Morris that can be viewed here. We are intrigued by these efforts, though these are still early days.
Concluding Thoughts
On the back of its strong performance seen during the first three quarters of 2021, Philip Morris International raised its quarterly dividend to $1.25 per share starting in the third quarter of this year (up 4% on a sequential basis). We continue to like Philip Morris International as an idea in our High Yield Dividend Newsletter portfolio (more on that here). Shares of PM yield ~5.2% as of this writing.
Downloads
Philip Morris’ 16-page Stock Report (pdf) >>
Philip Morris’ Dividend Report (pdf) >>
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Callum Turcan does not own shares in any of the securities mentioned above. Philip Morris International Inc (PM) and Vanguard Consumer Staples ETF (VDC) are both included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Long put options on the SPDR S&P 500 ETF Trust (SPY) with an expiration date of December 31, 2021, and strike price of $412 are included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.