Philip Morris International (PM) reported its second-quarter earnings results on Thursday. The company reported adjusted EPS of $1.46, outperforming analysts’ expectation of $1.32 by 10.6%. The company’s revenue came in at $7.70 billion, beating analysts’ estimate of $7.37 billion. Following its impressive second-quarter performance, Philip Morris’s management raised its sales growth and EPS guidance for 2019.
The company’s better-than-expected second-quarter performance and the increasing of its guidance appear to have led its stock to rise. On Thursday, it rose to a high of $89.45 before closing at $87.71, up 8.2% from its previous day’s closing price.
This year, Philip Morris has outperformed its peers and the broader equity market. YTD (year-to-date), the company has returned 31.4%. During the same period, its peers Altria Group (MO) and British American Tobacco have returned 2.3% and 22.3%, respectively. The S&P 500 Index and the Consumer Staples Select Sector SPDR ETF have returned 19.5% and 18.8%, respectively. XLP has invested 9.5% of its holdings in cigarette and tobacco companies.
PM’s revenue falls
YoY (year-over-year), Philip Morris’s revenue fell 0.3% from $7.73 billion in the second quarter of 2018. However, excluding the negative impact of $447 million from currency translation, the company’s revenue rose 5.4%. Higher shipment volumes of heated tobacco units and a favorable price variance drove PM’s revenue. However, a decline in the shipment volumes of cigarettes offset some of the revenue increase.
For the quarter, the RRPs (Reduced-Risk Products) segment reported revenue of $1.47 billion. YoY, the segment’s revenue increased 43.7% from $1.02 billion in the second quarter of 2019. Excluding currency, the segment’s revenue rose 49.8%. Overall, the shipment volumes of heated tobacco units increased 37.0%, driving the segment’s revenue. During the quarter, heated tobacco units reported strong performances in the European Union, Eastern Europe, and Latin America & Canada regions. The company surpassed 11 million IQOS users, with 70% of them entirely switching to IQOS.
PM’s revenue in the Combustible Products segment fell 7.4%. However, excluding currency translation, the segment’s revenue rose 0.3%. A favorable price variance of 6.0% driven by strong pricing variances in Germany, Indonesia, Japan, the Philippines, Russia, and Turkey drove the segment’s revenue. However, the decline in shipment volumes of combustible products by 3.6% offset the majority of the gains from the favorable pricing variance.
Philip Morris’s EPS rise
For the quarter, Philip Morris reported diluted EPS of $1.49. However, removing special items, the company’s adjusted EPS came in at $1.46. YoY, its adjusted EPS rose 3.5%. The expansion of its EBIT margin, lower interest expenses, and a lower effective tax rate drove PM’s EPS during the quarter.
PM’s EBIT margin expanded from 40% to 41.7% in the period. A favorable pricing variance and an increase in sales volumes of heated tobacco units from regions with relatively high unit margins drove the company’s EBIT margin. However, higher manufacturing costs and an increase in marketing, administration, and research costs offset some of the expansion in PM’s EBIT margin.
After reporting better-than-expected second-quarter results, PM’s management raised its revenue growth and EPS guidance. Management hiked its currency-neutral revenue growth guidance to 6% from its earlier guidance of 5%. They expect its combined shipment volumes of cigarettes and RRPs to decline by 1.0%. Earlier, management had expected the fall to be in the range of 1.5%–2.0%. PM’s management also raised its adjusted EPS guidance for 2019 to $5.14 from its earlier guidance of $5.09.
For the same period, analysts expect Philip Morris to report revenue of $29.81 billion, which implies a rise of 0.6% from $29.63 billion in 2018. A favorable pricing variance and growth in the sales of RRPs are likely to drive the segment’s revenue. The company’s management expects a favorable pricing variance of over 5.0% for its combustible products in 2019. It recently hiked the price of its products in Mexico and Ukraine, a move that’s also expected to contribute to revenue growth.
With the competition in the RRP space expected to rise, PM has increased its investments in its RRPs to $400 million for 2019 from the earlier $300 million. The company will be utilizing half of the $400 million investment in the third quarter. It’s working on broadening its portfolio of HEETS to meet customers’ unique taste preferences. On April 30, the US FDA authorized the sale of IQOS in the US. The company has formed an exclusive partnership with Altria Group to introduce IQOS in the US.
For the same period, analysts expect PM’s adjusted EPS to be $5.18, which implies a rise of 1.5% from $5.10 in 2018. An improvement in its EBIT margin, a decline in interest expenses, and a lower effective tax rate are likely to drive the company’s EPS.
Philip Morris stock’s rise of 8.2% since it reported its second-quarter results has led to a rise in its valuation. On Thursday, the company was trading at a forward PE multiple of 16.1x compared to 15.2x before its announcement of its second-quarter earnings. In comparison, Philip Morris is trading at a premium compared to Altria Group. On the same day, Altria was trading at a forward PE multiple of 11.6x. Its disappointing first-quarter performance and a decline in its traditional cigarette volumes led to the fall in Altria’s stock price and valuation multiple.
On Thursday, Philip Morris was trading at 17.0 times analysts’ 2019 EPS estimate of $5.20 and 15.7 times analysts’ 2020 EPS estimate of $5.57. It expects its EPS to rise 1.5% in 2019 and 7.7% in 2020.
After Philip Morris’s impressive second-quarter performance, Barclays upgraded its stock from “equal weight” to “overweight.” Barclays also hiked its price target from $82 to $100. Wells Fargo increased its price target from $100 to $102.
Overall, analysts favor “buy” ratings on Philip Morris, with 66.7% of the 18 analysts that follow the stock giving it “buys.” On average, analysts have a 12-month price target of $95.71 on the stock, which implies a potential upside of 9.1%.
PM’s peer Altria is scheduled to report its second-quarter earnings results on July 30. Stay tuned for our earnings preview.