Why Is Philip Morris (PM) Down 3.2% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Philip Morris (PM). Shares have lost about 3.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Philip Morris due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Philip Morris Q2 Earnings Top Estimates, Raises View

Philip Morris delivered second-quarter 2019 results, with the top and the bottom line beating the Zacks Consensus Estimate. Also, the company’s earnings improved year on year. Apart from favorable pricing, the quarterly results benefited from improved revenues and shipment volumes in the heated tobacco category. Further, management raised earnings view for 2019. On the flip side, dismal performance in the combustible category was a drag. This exerted pressure on the company’s top line.

Quarter in Detail

Adjusted earnings per share (EPS) of $1.46 beat the Zacks Consensus Estimate of $1.33. Also, the bottom line improved 3.5% year over year. Excluding currency impacts, the bottom line rose 8.5% from the year-ago quarter’s tally. On a like-for-like basis, after excluding currency, the bottom line improved 15%.  

Net revenues of $7,699 million beat the Zacks Consensus Estimate of $7,352 million. However, the top line declined 0.3% in the reported quarter. Nevertheless, the metric was up 5.4% on a constant-currency (cc) basis, backed by favorable pricing across most regions.

During the quarter under review, revenues from combustible products declined 7.1% to $6,233 million. Except South & Southeast Asia and Middle East & Africa, figures in the category declined across most regions. Further, revenues in the Reduced-Risk Products (RRPs) improved 43.7% to $1,466 million. Growth in RRPs in most regions was partially offset by decline in Middle East & Africa and Latin America & Canada.

Total cigarette and heated tobacco unit shipment volume inched down 1.4% to 198.9 billion units. Cigarette shipment volume went down 3.6% to 183.8 billion units in the second quarter, while heated tobacco unit shipment volume of almost 15.1 billion units rose 37% year over year.

Adjusted operating income rose 3.8% to reach $3,210 million. On a like-for-like basis, after excluding currency, adjusted operating income went up 15.7% year over year. The metric rose 9.1% at cc.

Adjusted operating margin also expanded 170 basis points to 41.7%. Excluding currency, the metric improved 1.4 percentage points.

Region-Wise Performance

Net revenues in European Union increased 3% to $2,577 million. Revenues climbed 11.6% at cc, courtesy of favorable pricing and volume/mix. Total shipment volume in the region inched up 0.5% to 49,410 million units.

In Eastern Europe, net revenues grew 8.2% to $822 million and rose 16.8% at cc. The upside can be attributed to favorable pricing and volume/mix. Total shipment volumes increased 1.6% to 29,887 million units.

In Middle East & Africa region, net revenues declined 1.8% (up 7% at cc) to $1,004 million. Further, total shipment volumes contracted 7.9% to 32,378 million units.

Revenues in South & Southeast Asia rose 8% (up 10.7% at cc) to $1,248 million. Performance was aided by favorable pricing variance.  Shipment volumes grew 3.5% to 46,376 million units.

Revenues from East Asia & Australia improved 2.9% (up 4.6% at cc) to $1,521 million, mainly due to favorable pricing and partially countered by unfavorable volume/mix. Total shipment volumes fell 3% to 22,273 million units.

Finally, revenues from Latin America & Canada fell 34.7% (down 32.5% at cc) to $527 million. Moreover, total shipment volumes were down 8.4% to 18,531 million units.

Other Financials

Philip Morris ended the quarter with cash and cash equivalents of $4,008 million. Also, the company had long-term debt of $24,858 million and shareholders’ deficit of $9,409 million.

Also, in the reported quarter, management paid quarterly dividend of $1.14 per share.

Guidance

Philip Morris raised its outlook for 2019. Adjusted earnings are now expected at $5.14 compared with the earlier forecast of $5.09. The revised view indicates growth of almost 6% from the year-ago quarter’s figure. Excluding the impacts of unfavorable currency of approximately 14 cents, earnings are projected to rise at least 9% to reach $5.28. Further, management expects effective tax rate for 2019 to be roughly 23%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -6.01% due to these changes.

VGM Scores

Currently, Philip Morris has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Philip Morris has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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