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What to Expect from Philip Morris’s Q1 Earnings

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As of April 13, Philip Morris International (NYSE:PM) was trading at 73.95—a fall of 11.3% since the announcement of its fourth-quarter earnings on February 6. Weakness in the border equity markets due to COVID-19 led to a fall in the company’s stock price. Meanwhile, the company reported a better-than-expected fourth-quarter performance. To learn more, read Philip Morris Beats Analysts’ Top and Bottom-Line Estimates. The company will report its first-quarter earnings before the market opens on April 21. Let’s look at analysts’ expectations for Philip Morris’s first-quarter performance.

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Analysts’ expectations for Philip Morris

Analysts expect Philip Morris to report revenue of $6.79 billion in the first quarter of 2020—a rise of 0.6% from $6.75 billion in the same quarter the previous year. I think that the growth in sales of RRPs (reduced-risk products), favorable pricing, and one extra day of operations (2020 is a leap year) could drive the company’s revenue. However, the decline in the company’s cigarette shipments could offset some of the sales growth.

In 2019, Philip Morris introduced iQOS in eight new markets. The product was available in 52 markets by the end of last year. The markets represent 44% of the company’s total international markets. Also, the company introduced iQOS 3 DUO late in 2019. The product offers a more premium and modern designed product with a rapid charge battery. Overall, the company estimated that there were 14 million iQOS users at the end of 2019. Among the users, nearly 71% or 10 million had completely shifted to iQOS.

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Meanwhile, the company has partnered with Altria (NYSE:MO) to market iQOS in the US. Philip Morris introduced the product in two lead markets in the US. The company has also submitted a supplemental PMTA (Pre-market Tobacco Product Applications) application for its iQOS 3 in the US. So, I expect the growth in iQOS users and expanded product availability to drive the company’s revenue from RRPs.

What will drive Philip Morris’s EPS?

Analysts expect that Philip Morris will report an adjusted EPS of $1.12 during the quarter—a rise of 3.0% from $1.09 in the same quarter in 2019. Revenue growth, an improved EBIT margin, and lower interest expenses could drive the company’s EPS. Analysts expect the EBIT margin to improve from 37.1% to 38.6%. Favorable pricing and growth in higher-margin RRP sales could improve the company’s EBIT margin during the quarter.

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Dividends

On March 5, Philip Morris announced quarterly dividends of $1.17 per share, which represents an annualized payout rate of $4.68 per share. As of April 13, the company’s dividend yield was 6.3%. On the same day, Altria’s dividend yield was 8.4%.

Management’s 2020 outlook

Philip Morris’s management expects the total shipment of cigarettes and heated tobacco units to fall by 2.5% to 3.5% this year. The company said that increased taxes in Indonesia, a ban on menthol cigarettes in Europe in May 2020, and an industry-wide decline of 1%–2% in the cigarette volume could lower the company’s cigarette shipments. The decline in Philip Morris’s total shipment volumes could offset some of the revenue growth. For the same period, management expects the adjusted EPS to rise by 7.2% to $5.50.

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Valuation multiple

The recent decline in Philip Morris’s stock price has also dragged its valuation multiple down. As of April 13, Philip Morris was trading at 13.6x compared to 15.0x before the announcement of its fourth-quarter earnings. Despite the fall, the company is trading at a premium compared to Altria, which was trading at a forward PE ratio of 9.12x on the same day.

With the recent correction in the stock price, Philip Morris is trading at 13.9x analysts’ 2019 EPS estimate of $5.32 and at 12.9x analysts’ EPS estimate of $5.75. These EPS expectations represent a YoY growth of 2.6% and 8.0% in 2020 and 2021, respectively.

Analysts’ recommendations for Philip Morris

Since March, many analysts have cut their target prices. Citigroup, Credit Suisse, Barclays, UBS, Piper Sandler, and Cowen have all lowered their target prices for the stock. However, Credit Suisse upgraded Philip Morris stock to “neutral” from “underperform” on March 30. As of April 13, analysts’ consensus target price is $84.87. The target price represents a 12-month return potential of 14.8% from the closing price on April 13. Despite the price cuts, Wall Street is still bullish on the stock.

Among the 18 analysts that follow Philip Morris, 72.2% recommend a “buy,” while 27.8% recommend a “hold” rating. None of the analysts recommend a “sell.”

My take

Since the beginning of this year, Philip Morris has lost 11.3% of its stock value. The stock has outperformed its peers and the broader equity market during the same period. Altria has fallen by 19% YTD, while the S&P 500 Index has fallen by 14.5%. With global financial markets in a tailspin amid COVID-19, Philip Morris stock could experience weakness in the near term. However, being a defensive stock, I think that Philip Morris’s business won’t be impacted much due to the slowdown in the economy. The company looks attractive at its current valuation and high dividend yield. So, I think that investors should utilize the dips to accumulate the stock for greater returns.

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