A downturn in global business activity is hurting U.S.-based companies, which are reporting the worst business results throughout the last decade. Many leading companies have recently announced lower profits and reduced revenue expectations, and the slowdown in European Union is cited as a key reason for these forecasts. Among the business giants to issue warning estimates are FedEx, PMI and Pepsi.
This demonstrates that it might be wiser for analysts to underweight multinational companies, inclined to business activity in Europe. The stocks of the largest tobacco companies have also being hit by the latter scenario, which is prompting more experts to lower expectations from Philip Morris International, while raising Altria Group instead.
Two weeks ago, PMI reduced its full-year outlook for the second time in 2012, on grounds of currency movements and stronger USD, and warned about weaker sales in the Western Europe. The tobacco giant now predicted a currency downfall of nearly 25 cents per share for the current year, versus the 19-cent-per-share benefit reported in 2011.
Philip Morris also expects moderate second-quarter results in the European Union, due to considerable trimestrial erosion in the industry-wide volume across the Southern Europe, especially in Italy and Spain, which are currently dealing with severe economic downturn, and growing unemployment rates have been particularly concerning, since lower available income can prompt customers to stop smoking or turn to black market of counterfeit products.
Although solid performance in Asia, the largest market by sales volume for the company, has contributed to earnings boost recently, the developed European market is a vital part of the business. Cigarette shipments across Europe accounted for 23% of the company’s total volume in 2011.
PM recently unveiled plans to create three tobacco products of next generation, which will be able to lower health complication related to smoking, however, these innovative tobacco products will be available from 2017.
In addition, Philip Morris International also announced a three-year share buyback program, equaling $18 billion, in attempt to return more funds to shareholders. Therefore, solid cash flows, share buyback and dividend yields have attracted investors to tobacco stocks lately. PMI offers dividend yield of 3.6 percent currently, as dividends grew by 20% during the past 12 months.
In contrast, Altria markets its products only across the United States, which saves revenues from exposure to currency shifts. Whereas American cigarette market is shrinking, Altria is focusing on smoke-free tobacco products in order to keep revenue growth in the long-term basis. In addition, the company recently implemented price increase for all of its key brands, including Marlboro and L&M cigarette brands. According to the analysts, that is a positive signal, symbolizing that tobacco industry still has pricing power. The company posted 4.84% dividend yield, growing up by 7.9 percent from the last year.
Whereas both tobacco stocks are regarded as long-term purchases, Altria Group is expected to perform stronger in the next two-three years. Philip Morris will keep dealing with downturns from currency fluctuations, while the crisis in European Union may hurt its revenues for years. This makes many experts consider moving investments from PMI to Altria until the headwinds are over for Philip Morris.