Tobacco company earnings boosted by higher prices

Some of the world’s largest tobacco companies showed this week that even in a sluggish global economy they have the power to raise prices in most countries and beat earnings expectations.

Philip Morris International Inc (PM.N), which sells Marlboro cigarettes outside the United States and Reynolds American Inc (RAI.N), which sells Camel and other brands in the United States, posted higher-than-expected quarterly profits on Thursday and raised their 2010 earnings forecasts.

The results came a day after Philip Morris USA parent Altria Group Inc (MO.N) raised its forecast for the year after the 2010 first half was better than expected.

The tobacco companies’ figures helped mitigate concerns that a large increase in the U.S. tax on tobacco last year and high global unemployment would force a switch by consumers to lower-priced smokes.

“This industry is all about pricing,” Morningstar analyst Phil Gorham said. “They’ve still got very strong pricing power.”

The one exception is in Western Europe, where Philip Morris saw a 6.2 percent drop in cigarette shipments due to a weak economy in Spain, a declining market in Germany and tax increases in Greece.

“Weakness in Western Europe was not very surprising,” Gorham said. Places like Spain have very high unemployment and that killed demand, he said.

Still, Philip Morris is in many emerging markets where cigarette sales continue to grow and, unlike Altria and Reynolds, it is not exposed to the U.S. market, where smoking has declined steadily for years.

Philip Morris International, the world’s largest non-state-controlled tobacco company, said profit was $1.98 billion, or $1.07 a share, in the second quarter, up from $1.55 billion, or 79 cents a share, a year earlier.

Analysts on average forecast 97 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose 14.3 percent to $17.4 billion.

The company shipped 240.96 billion cigarettes in the quarter, up 8 percent from a year earlier. Part of the increase was fueled by customers stocking up in Japan ahead of a tax increase that takes effect October 1.

Higher prices helped lift the company’s operating income by 15 percent, excluding the impact of currency fluctuations.

The company said it expects earnings of $3.75 to $3.85 a share for the year, compared with its forecast a month ago of $3.70 to $3.80.

Philip Morris shares were up $1.05 at $50.94 on the New York Stock Exchange.

Reynolds American said profit was $341 million, or $1.17 a share, in the second quarter, weighed down by plant-closing costs, compared with $377 million, or $1.29 a share, a year earlier.

Excluding one-time items, earnings were $1.32 a share, 2 cents above the average analyst estimate.

Sales were little changed at $2.25 billion. In the 2009 second quarter, shipments were skewed higher by the timing of the U.S. tax increase.

The company shipped 20.3 billion cigarettes in the quarter, down 9.5 percent from a year earlier, but key brands Camel and Pall Mall both increased market share.

Reynolds also shipped 97.1 million cans of smokeless tobacco under brands like Grizzly and Kodiak.

Reynolds expects full-year earnings, excluding one-time items, of $4.90 to $5.05 a share, up from a previous forecast of $4.80 to $5. Analysts on average expect $4.92.

Reynolds shares were up 51 cents at $56.33. Altria was up 18 cents at $21.59.

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