Cigarette giant Philip Morris ((PM - Analyst Report)) is seeing tumbling volumes as anti-tobacco campaigns have led to a sizable decline in demand.
Pressed by a weak tobacco business, the company has recently reduced its earnings guidance for fiscal year 2014. Following the cut in the outlook, the company’s share prices have plunged roughly 5% in a little over the past week (read: Market Beating Sector ETFs of 2014's First Half).
Philip Morris Lowers Earnings Forecast
The company has reduced its earnings per share (EPS) forecast for fiscal year 2014 from a range of $5.09 to $5.19 to a new range of $4.87 to $4.97. Weak macroeconomic environment in the European Union, rising illicit trade in Asia, costs related to restructuring and higher excise taxes are some of the factors that have prompted the company to lower its outlook.
The company however expects its EPS to grow by 6% to 8% this fiscal year excluding asset impairment and exit cost charges related to the discontinued cigarette production in the Netherlands in 2014 and an unfavorable currency impact.
Higher excise taxes on cigarettes and advertising restrictions on cigarette makers have led to a pricing war. Philip Morris is facing stiff competitive pressure from several local brands in key markets such as Japan’s Melvis Cut and Philippines brands like Mighty and Marvel.
Besides closing its Netherlands plant, the company has recently relocated its six decade old manufacturing plant from Australia to South Korea on account of dwindling volumes (read: 2 Recession Proof Sector ETFs for This Stormy Market).
In the face of a softening tobacco business, the company has been planning new investments in order to diversify its product portfolio. Philip Morris plans to roll out its Marlboro Architecture 2.0 and is also undergoing several restructuring programs to facilitate the launch of its ‘Next Generation Products (NGP)’ in fiscal 2015.
For fiscal 2015, Philip Morris expects adjusted earnings growth in the range of 8–10%.
Not only has Philip Morris underperformed its peers in the past week, it has also been a laggard in the year-to-date frame. The company has posted a negative 2% return this year, as compared to a 10% return by Altria and a roughly 22% gain by Lorillard and Reynolds American each.
Weak performance by Philip Morris is expected to put some downward pressure on Consumer Staples ETFs that are heavily invested in the cigarette giant. This is all the more true as the company currently has a Zacks Rank #4 (Sell) and falls in a poor industry category. This portends downside movement in PM’s share price and the following ETFs in the coming weeks:
Consumer Staples Select Sector SPDR ((XLP - ETF report)) – PM has 7.9% Allocation
This fund is the most popular product within the Consumer Staples equities space, having an asset base of $6.6 billion. The fund tracks the S&P Consumer Staples Select Sector Index and holds a small basket of 42 stocks.
The fund has the largest exposure to Procter & Gamble Company, followed by Coca-Cola and Philip Morris. The trio has a roughly 30% allocation in the fund (see all Consumer Staples ETFs here).
The fund nicely diversifies itself among different industries such as Food & Staples Retailing, Household Products, Beverages, Food Products and Tobacco.
The fund is one of the cheapest in the category with 18 basis points as expenses and has returned a modest 5% since the start of the year.
XLP currently carries a Zacks ETF Rank #4 or Sell rating.
MSCI Consumer Staples Index ETF ((FSTA - ETF report)) – PM has 7.4% Allocation
FSTA tracks the MSCI USA IMI Consumer Staples Index, holding a basket of 104 stocks.
Philip Morris occupies the third spot here having 7.4% allocation while Procter & Gamble, Coca Cola and PepsiCo Inc are the top two holdings. Like XLP, this fund too has a nice mix of the Consumer Staples sector.
The fund charges 12 basis points as fees and has returned 5.7% this year.
Vanguard Consumer Staples ETF (VDC) – PM has 7.2% Allocation
Launched in January 2004, VDC is the second most popular product in the space managing an asset base of $1.9 billion.
The fund holds 109 stocks with Procter & Gamble, Coca-Cola and Philip Morris being the top three holdings. The ETF is quite concentrated among its top 10 components which together form 60% of total fund assets.
The fund currently has a Zack ETF Rank #4.
The three above mentioned ETFs did not perform as badly as the stocks, primarily because they diversify in other industries as well. However, investors should keep in mind that the overall Consumer Staples sector has been a laggard this year (read: A Comprehensive Guide to Consumer Staples ETFs).
A rough consumer spending environment, foreign exchange headwinds and declining volumes are some of the factors for the weakness within the sector. Moreover, difficult operating conditions in Europe and a slowdown in some Asian countries, like China, also weighed on the sector’s outlook.
As such, most of the Consumer Staples ETFs currently have a Zacks ETF Rank #4. Investors are thus advised to take a cautious approach or stay away from this space for now.
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