What to Expect from Philip Morris in Q4

Philip Morris International (NYSE:PM) will report its fourth-quarter earnings before the market opens on Thursday. For the quarter, analysts expect the company’s revenue to rise and its adjusted EPS to fall.

Philip Morris’s revenue to rise

For the fourth quarter, analysts expect Philip Morris to report revenue of $7.66 billion, which represents a rise of 2.2% from $7.50 billion in the fourth quarter the previous year. The company’s revenue could increase due to growth in the sales of RRPs (reduced risk products) and favorable pricing. However, a decline in the cigarette shipment volume and unfavorable currency could lower the company’s revenue.

During the third-quarter earnings call, Philip Morris’s management estimated that approximately 12.4 million individuals use iQOS. The company estimated that 71% or 8.8 million individuals shifted entirely to iQOS and stopped smoking. Philip Morris expanded iQOS to 51 markets with the recent induction in Belarus, the United Arab Emirates, and the US. The company introduced iQOS 3 DUO in September 2019 in Japan. Philip Morris planned to expand the product to other markets by the end of 2019. All of these factors could drive the company’s revenue. However, higher cigarette prices and increased excise tax could lower the company’s cigarette shipment volume and offset some of the revenue gains.

Will the EPS fall?

After reporting its third-quarter earnings, Philip Morris lowered its EPS guidance for 2019. The company’s management lowered its diluted EPS guidance to $4.53 from $4.73 on November 4 due to manufacturing restructuring charges in Germany. However, they expect the company’s adjusted EPS to be $5.14, which represents 0.8% growth from $5.10 in 2018.

Analysts expect Philip Morris to report an EPS of $1.21 in the fourth quarter of 2019—a fall of 3.3% from $1.25 in the same quarter of 2018. Increased interest expenses and a higher effective tax rate could lower the company’s EPS. However, higher revenue and gross margins could offset some of the declines. During the quarter, analysts expect Philip Morris’s gross margin to improve from 62.9% to 63.3%. Also, the company’s SG&A expenses could fall from 26.6% of the total revenue to 24.7%. We expect favorable pricing and increased sales from higher-margin RRPs to lower the company’s SG&A expenses as a percentage of the total revenue. Analysts expect the company’s effective tax rate to be 24.1%—an increase from 21.6% in the same quarter the previous year.

Philip Morris’s dividends

On December 4, 2019, Philip Morris declared quarterly dividends of $1.17 per share at an annualized payout rate of $4.68 per share. As of January 31, 2020, the company’s dividend yield is 5.55%. On the same day, Altria Group’s (NYSE:MO) dividend yield was 7.0%.

Analysts’ recommendations

Since the beginning of 2020, four analysts have raised their target prices. Jefferies has raised its target price from $72 to $83, Cowen and Company increased its target price from $82 to $87, J.P. Morgan increased its target price from $86 to $93, and Piper Sandler increased its target price from $105 to $114. As of January 31, analysts have a consensus target price of $95.55. The target price represents a 12-month return potential of 13.1%. Overall, 17 analysts follow Philip Morris as of January 31. Among the analysts, ten favor a “buy,” six favor a “hold,” and one favors a “sell” rating.

Philip Morris’s stock performance

As of January 31, Philip Morris was trading at $82.70, which implies a rise of 4.6% since the announcement of its third-quarter earnings on October 17. The better-than-expected third-quarter earnings and growth in RRP sales increased investors’ confidence, which led to a rise in the company’s stock price.

After delivering strong returns of 27.5% in 2019, Philip Morris has lost 2.8% of its stock value this year as of January 31. Altria has lost 5.1% of its stock value YTD. On January 30, Altria reported its fourth-quarter results. During the quarter, the company missed analysts’ revenue estimates but met the EPS expectations. To learn more, read Altria Meets Earnings Estimates, Misses on Revenue.

Valuation multiple

As of January 31, Philip Morris was trading at a forward PE ratio of 14.8x compared to 14.4x before the announcement of its third-quarter earnings. The increase in the company’s stock price led to a rise in its valuation multiple. On January 31, Altria was trading at 10.7x.

Also, Philip Morris was trading at 14.7x analysts’ 2020 EPS estimate of $5.61 and at 13.5x times the 2021 EPS estimate of $6.13. Meanwhile, analysts expect the company’s EPS to rise by 7.8% and 9.2% in 2020 and 2021, respectively.