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Philip Morris Beats Top and Bottom-Line Estimates in Q1

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Today, Philip Morris (NYSE:PM) reported its earnings results for the first quarter of 2020. For the quarter, the company reported an adjusted EPS of $1.21 on revenues of $7.15 billion. The company beat analysts’ revenue expectation of $6.84 billion and the adjusted EPS expectation of $1.13. However, after reporting the first-quarter performance, Philip Morris’s management withdrew its guidance for 2020 due to uncertainty surrounding the COVID-19 outbreak. Despite the impressive first-quarter performance, the company was trading 2.8% lower at 9:54 AM ET. Weakness in the broader equity market due to the decline in oil prices likely led to a fall in the company’s stock price.

Philip Morris’s revenue rose

For the first quarter, Philip Morris reported revenue of $7.15 billion—a rise of 6.0% from $6.75 billion in the same quarter of the previous year. Meanwhile, excluding the impact of currency translation, the company’s revenue increased by 7.1%. The favorable pricing variance and mix drove the company’s revenue during the quarter. However, the decline in IQOS device sales and cigarettes offset some of the increase in the company’s revenue.

During the quarter, the total shipment of cigarettes and heated tobacco units declined by 1.2%. The decline was due to a fall in cigarette shipments by 4.4%. However, the increase in heated tobacco units by 45.5% offset some of the declines. The cigarette shipments in the Middle East & Africa, South & Southeast Asia, and Latin America & Canada regions fell during this period. However, the shipment volume in the European Union, Eastern Europe, and the East Asia & Australia region increased during this period. Meanwhile, the shipment volume of heated tobacco units rose in all of the regions except the Middle East & Africa.

Philip Morris reported double-digit EPS growth

For the quarter, Philip Morris reported an EPS of $1.17. However, removing special items, the company’s adjusted EPS was $1.21, which represents growth of 11.0% from $1.09 in the same quarter of the previous year. The revenue growth and increased adjusted operating margin drove the company’s adjusted EPS during the quarter. For the quarter, the company’s adjusted operating margin improved from 37.1% in the first quarter of 2019 to 39.0%. A decline in the cost of sales and lower marketing, administration, and research costs drove the company’s adjusted operating margin. During the quarter, the cost of sales fell by 2.6% to $2.40 billion, while the marketing, administration, and research costs declined by 12.3% to $1.94 billion.

Philip Morris’s management withdrew 2020 guidance

Today, Philip Morris’s management withdrew its earlier guidance for 2020 due to uncertainty amid COVID-19. However, management announced its guidance for the second quarter. The company will likely report a diluted EPS of $1.00–$1.10. The amount includes the impact of an unfavorable currency translation of $0.12 per share.

Amid the spread of COVID-19 and the related restrictions imposed by governments, Philip Morris’s management expects the following areas to be impacted.

  • Management expects the company’s duty-free business to be impacted severely due to travel restrictions. Last year, the division contributed 4% of the company’s total sales.
  • Due to lockdown restrictions, field sales forces’ ability to engage with adult smokers could be limited. So, management expects a slowdown in new user acquisition for its iQOS.
  • Earlier, the Indonesian government announced that it would implement a new minimum price on April 1. However, the outbreak forced the government to delay the implementation until June.

Stock performance

So far in 2020, Philip Morris has lost 9.7% of its stock value as of April 20. Weakness in the broader equity market led to a fall in the company’s stock price. However, the company has outperformed the broader equity markets and its peers. During the same period, Altria Group (NYSE:MO) has fallen by 21.7%, while the S&P 500 Index has declined by 12.6%.

Amid the financial turmoil, I think that Philip Morris would be a safe bet. The company has expanded its iQOS market. Philip Morris introduced the product in two lead markets in the US. Also, the company has submitted a supplemental PMTA application for its iQOS 3 in the US. So, I think that investors should accumulate the stock on dips.

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