Philip Morris Earnings are Slamming These Tobacco Stocks

Following lower-than-normal sales in the European Union, Philip Morris International (NYSE:PM) reported third-quarter profit Thursday that missed analysts’ projections.

Cigarette shipments were down 1.3 percent for the quarter and net income fell 6.3 percent to $2.23 billion, or $1.32 a share, from $2.38 billion last year. According to Bloomberg, analysts estimated that Philip Morris would report earnings per share of $1.39.

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Philip Morris is Europe’s largest cigarette manufacturer and Eastern Europe, Africa, and the Middle East account for approximately a third of its global sales.

However, the company has run into several problems in Europe. First, the world’s second-largest market for cigarette makers, Russia, has plans to submit a bill to lawmakers that proposes to outlaw all cigarette advertising and sponsorship. Second, high unemployment in the European Union caused smokers to cut back or switch to contraband cigarettes over the last quarter. In the zone, Philip Morris shipments fell by 8.1 percent.

This quarter marks the first time the company missed analysts profit estimates in eight quarters, according to Bloomberg.

Seeking Alpha noted in a recent article that while Philip Morris has strong profitability and free cash flow generation, the company’s “weak growth potential remains a concern.” The tobacco company’s earnings release showed just that. The number of cigarettes the company shipped last quarter amounted to 236.5 billion, a full one percent less than the previous quarter. In the same quarter last year, cigarette shipments rose by 4 percent. According to the Huffington Post, Philip Morris has “compensated for volume declines by raising prices and cutting costs.”  Shipments also fell nearly 5 percent in Latin America and Canada.

As Stifel Financial analyst Christopher Growe told Bloomberg, shipments fell on “another very weak performance in Europe not completely offset by robust growth throughout the rest of the world including emerging markets.”

European austerity measures, however, were not the only factors to influence shipment levels for Philip Morris nor will Philip Morris be the only tobacco company to post lower shipment levels. “Despite higher prices,” said Seeking Alpha, “the industry is having trouble keeping demand up as governments start to enact stricter packing laws.”

Australia has already passed a law requiring cigarettes to be labeled with graphic images of gangrenous limbs and cancer victims and before the scandal forced the resignation of John Dalli as European commissioner for health and consumer policy, he had plans to enact stricter tobacco legislation as well.

The company’s decreasing cigarette shipments have investors in all tobacco companies concerned. Shares in Philip Morris fell 2.2 percent on Thursday following the company’s earnings report while shares of Reynolds American (NYSE:RAI), Lorillard (NYSE:LO), and Altria (NYSE:MO) were down too. PM did manage to gain a few cents back on Friday.

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