Devin- Do you have any issues with PM's quality of earnings? Tobacco Insider wrote an interesting piece a few weeks ago addressing their EPS vs. Adjusted EPS. They said EPS has been flat for the past decade and that is the main reason the stock price of PM has gone nowhere. I'd be curious to your thoughts.
While there always seems to be a new series of one-time charges, the vast majority of headwinds since spin have been from adverse currency effects. It’s key to recognize the rapid growth of higher contribution products for the company has only been in the last few years - along with higher investment needs that also weigh on earnings. I do not know “Tobacco Insider” and have only seen a bit of their work shared on X/Twitter. I rarely agree with their views or approach.
As product mix shifts to higher contribution products and requisite reinvestment as a percentage falls, quality of cash flow should improve. This is on top of the strong performance of combustibles, which, with pricing, grow ever-higher in margin. As mentioned, I won’t pretend to have a crystal ball on currency, and only acknowledge new USD revenues can help smooth overall FX impact. At the same time, if the strength of the USD reverses, PMI may face criticism for such actions - of course only in hindsight.
Hi John, I have read this article as well. I don't think there's much PM can do to hedge the FX risk, apart from Japan, which PM is already partially hedging. If relative purchasing power parity (RPPP) holds, we may expect inflation differential between two countries to account for FX movement. This is true for countries with high inflation rate such as Turkey or Argentina, which are likely to see their currencies depreciate over time vs USD at similar magnitude to inflation rate differential vs United States. As such, the need for FX hedging would be minimal as hypothetically, 10% currency depreciation vs U.S. would be naturally hedged by 10% inflation differential between two countries. Hence when reporting financials, FX neutral numbers will be less meaningful than numbers reported in USD. And as we know, significant amount of PM's revenue is dominated in emerging market currencies which has structural issues of hyper inflation and hence secular depreciation vs USD.
Japan is kind of a special case as the country has very high degree of self sufficiency so currency depreciation has little to do with inflation differential vs USD. If the same degree of currency depreciation happens in any other economy in the world, you may expect inflation to be at least 30% but that is not happening in Japan. So that's why PM partially hedged its JPY exposure because there's limited natural hedge here.
So I guess from valuation perspective, EPS growth (as reported) would be more meaningful than adjusted EPS growth on FX neutral basis. But adjusted EPS still reflects quality of PM management to certain extent.
Thanks for the detailed comment, Anthony. Worth noting, over the last few years EMs have become lesser volume contributors - which also helps against negative FX pressures.
Devin- Do you have any issues with PM's quality of earnings? Tobacco Insider wrote an interesting piece a few weeks ago addressing their EPS vs. Adjusted EPS. They said EPS has been flat for the past decade and that is the main reason the stock price of PM has gone nowhere. I'd be curious to your thoughts.
https://tobaccoinsider.com/pmi-not-all-roses/
Thanks.
While there always seems to be a new series of one-time charges, the vast majority of headwinds since spin have been from adverse currency effects. It’s key to recognize the rapid growth of higher contribution products for the company has only been in the last few years - along with higher investment needs that also weigh on earnings. I do not know “Tobacco Insider” and have only seen a bit of their work shared on X/Twitter. I rarely agree with their views or approach.
As product mix shifts to higher contribution products and requisite reinvestment as a percentage falls, quality of cash flow should improve. This is on top of the strong performance of combustibles, which, with pricing, grow ever-higher in margin. As mentioned, I won’t pretend to have a crystal ball on currency, and only acknowledge new USD revenues can help smooth overall FX impact. At the same time, if the strength of the USD reverses, PMI may face criticism for such actions - of course only in hindsight.
Hi John, I have read this article as well. I don't think there's much PM can do to hedge the FX risk, apart from Japan, which PM is already partially hedging. If relative purchasing power parity (RPPP) holds, we may expect inflation differential between two countries to account for FX movement. This is true for countries with high inflation rate such as Turkey or Argentina, which are likely to see their currencies depreciate over time vs USD at similar magnitude to inflation rate differential vs United States. As such, the need for FX hedging would be minimal as hypothetically, 10% currency depreciation vs U.S. would be naturally hedged by 10% inflation differential between two countries. Hence when reporting financials, FX neutral numbers will be less meaningful than numbers reported in USD. And as we know, significant amount of PM's revenue is dominated in emerging market currencies which has structural issues of hyper inflation and hence secular depreciation vs USD.
Japan is kind of a special case as the country has very high degree of self sufficiency so currency depreciation has little to do with inflation differential vs USD. If the same degree of currency depreciation happens in any other economy in the world, you may expect inflation to be at least 30% but that is not happening in Japan. So that's why PM partially hedged its JPY exposure because there's limited natural hedge here.
So I guess from valuation perspective, EPS growth (as reported) would be more meaningful than adjusted EPS growth on FX neutral basis. But adjusted EPS still reflects quality of PM management to certain extent.
Thanks for the detailed comment, Anthony. Worth noting, over the last few years EMs have become lesser volume contributors - which also helps against negative FX pressures.
Another great Write up Devin. Thanks!🙏
Thanks, Pat!