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Why Analysts Expect Philip Morris’s Revenue and EPS to Fall in Q2

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Philip Morris International (PM) is scheduled to announce its second-quarter earnings results before the market opens on July 18. In the quarter, analysts expect Philip Morris’s revenue and EPS to fall.

Philip Morris’s revenue to fall

In the second quarter, analysts expect Philip Morris to report revenue of $7.40 billion, down 4.2% from $7.73 billion in the corresponding quarter of 2018. A decline in cigarette shipment volumes and unfavorable currency could lower the company’s revenue during the quarter. However, growth in the sales of RRPs (reduced-risk product) and favorable pricing could offset some of the declines in the company’s revenue in the quarter.

By the end of the first quarter, Philip Morris had introduced IQOS in 44 markets in key cities nationwide. IQOS is a Platform 1 RRP. In the first quarter, the number of IQOS users surpassed 10 million. Of these IQOS users, approximately 70% completely stopped smoking and switched to IQOS. In the quarter, RRPs generated sales of $1.2 billion, forming 18.4% of the company’s total sales.

Philip Morris launched its next generation of IQOS devices, the IQOS 3 and IQOS 3 MULTI, in mid-November last year. Customers reacted positively to these next-generation products. PM’s management is also focusing on an omni-channel strategy and geographic expansion to drive its sales.

The decline in PM’s EPS

Analysts expect Philip Morris to report adjusted EPS of $1.32 in the second quarter, a fall of 6.4% from $1.41 in the corresponding quarter of 2018. The fall in its revenue and its increased effective tax rate are likely to lower its EPS in the quarter. However, the improvement in its EBIT margin and its lower interest expenses could offset some of the fall.

For the quarter, analysts expect Philip Morris to report an EBIT margin of 40.5% compared to 40.0% in the corresponding quarter of 2018. Favorable pricing variance and the company’s initiatives to improve productivity will likely expand its EBIT margin. Analysts expect Philip Morris’s interest expenses to fall from $168.0 million to $155.2 million in the quarter. They expect its effective tax rate to be 22.9% compared to 22.1% in the corresponding quarter of the previous year.

Outlook for 2019

For 2019, Philip Morris’s management expects its currency-neutral net revenue to rise 5.0%. During the same period, management expects its shipment volumes to fall in the range of 1.5%–2.0%. Management also expects its adjusted EPS to be $5.09 compared to $5.10 last year. In the same period, analysts expect PM to report adjusted EPS of $5.15.

 

Stock performance

On July 15, Philip Morris was trading at $81.47, a fall of 4.7% since it reported its first-quarter earnings results on April 18. In the first quarter, Philip Morris outperformed analysts’ EPS and revenue expectations. However, after the announcement of its first-quarter earnings, the company’s management lowered its adjusted EPS guidance for 2019. Management decreased its EPS guidance due to the higher-than-expected impact of the consolidation of the company’s subsidiary in Canada. The lowering of Philip Morris’s 2019 EPS guidance lowered the company’s stock price.

On May 28, CNBC reported that data collected from Nielsen during the four weeks that ended on May 18 indicated a fall of 11.2% in cigarette sales by volume in the US. The announcement caused the stock prices of cigarette companies to fall. Weakness in the tobacco sector also brought Philip Morris stock down.

Despite its recent fall, Philip Morris is up 22.0% YTD (year-to-date). The company has outperformed the broader equity market this year. The S&P 500 Index is up 20.2%, and the Consumer Staples Select Sector SPDR ETF is up 18.0% YTD. XLP invests 8.8% in cigarette and tobacco companies. Peers Altria Group and British American Tobacco are up 0.3% and 14.7%, respectively, YTD.

Valuation multiple

The rise in PM’s stock price since the beginning of this year has also raised its valuation multiple. On July 15, the company was trading at a forward PE multiple of 15.1x compared to 12.6x at the beginning of the year. Philip Morris is trading at a premium to Altria Group. On July 15, Altria was trading at a forward PE multiple of 11.3x. Its stock has been under pressure due to its disappointing first-quarter performance and concerns about the decline in traditional cigarette volumes, which has lowered its valuation multiple.

On July 14, Philip Morris was trading at 15.8 times analysts’ 2019 EPS estimate of $5.15 and analysts’ 2020 EPS estimate of $5.57. Analysts expect its EPS to rise 0.9% in 2019 and 8.3% in 2020.

Analysts’ recommendations

Since Philip Morris reported its first-quarter earnings results on April 18, Bank of America Merrill Lynch and Barclays have upgraded its stock. On May 17, Bank of America upgraded the stock from “underperform” to “neutral.” On May 23, Barclays raised its rating to “equal-weight” from “underweight.” Cowen and Company and JPMorgan Chase have also hiked their price targets.

Overall, analysts have a “buy” rating on Philip Morris, with 61.1% of 18 analysts favoring “buys” and 33.3% advocating “holds.” The remaining 5.6% recommend “sells” on the stock. On average, analysts’ 12-month price target stands at $94.06, a rise of 14.5% from PM’s current price of $81.47.

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