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Philip Morris Grapples with Headwinds: Should You Still Hold?
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Tobacco maker Philip Morris International Inc. (PM - Free Report) seems to have hit a rough patch at the moment. The company’s shares gained 3.3% on a year-to-date basis, underperforming the Zacks categorized Tobacco industry, which has gained 10.3%. Increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds are the main factors that are weighing upon the company.
Let’s delve deeper and find out what’s going on with this Zacks Rank #3 (Hold) consumer staples stock.
Factors Affecting the Company
We note that Philip Morris has been experiencing lower volumes for the past few quarters primarily due to the general shift of consumption away from tobacco products. Although the company posted a positive surprise in third-quarter 2016, the average surprise in the trailing four quarters was a negative 3.8%. Further, cigarette shipment volumes fell 5.4% to 2.1 billion units in the third quarter, reported in Oct 2016, chiefly attributable to lower cigarette industry volume in Argentina, Indonesia, Philippines and Russia, as well as lower cigarette market share, notably in North Africa, Philippines and Russia.
Moreover, the company is losing share in Europe and the performance of Marlboro brand remains under pressure in the region. Further, the vapor category too did not perform as expected during the third quarter. The situation is not anticipated to improve soon and analysts are not bullish about the company as evident from the fact that they have moved their estimates downward significantly in the last 30 days.
Additionally, Philip Morris is facing competitive pressures from several local brands. These brands are cheaper and thus, negatively affect the company’s volume and sales. Such alternatives compel Philip Morris to keep its prices low, which consequently affect the margins.
Further, the tobacco industry faces many challenges which put margins under pressure. Governments worldwide are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. Such actions negatively impact margins of the company.
Nevertheless, we are encouraged that the company is focusing on less harmful tobacco products in order to cater to growing demand for low-risk, smokeless tobacco products. The company also has considerable presence in the unconventional tobacco products category. In Dec 7, 2016, it filed an application with the US Food and Drug Administration (FDA) for its IQOS products (Heatsticks that heat tobacco instead of burning it). Once the Modified Risk Tobacco Product (MRTP) claim is approved by FDA, the company will be able to enjoy a significant marketing advantage over other reduced risk tobacco products that are being sold currently.
Hence, we believe the concerns are transitionary in nature and will allow space for this company to rebound in the long run. Philip Morris has an expected earnings growth rate of 9% for the next five years.
Hence, we suggest investors to hold on to the stock and for the rest let's wait and watch.
Inter Parfums Inc. has an expected earnings growth of 15%. US Foods has an expected earnings growth rate of 17.1%, while Sysco Corporation has a long-term growth rate of 8.8%.
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>
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Philip Morris Grapples with Headwinds: Should You Still Hold?
Tobacco maker Philip Morris International Inc. (PM - Free Report) seems to have hit a rough patch at the moment. The company’s shares gained 3.3% on a year-to-date basis, underperforming the Zacks categorized Tobacco industry, which has gained 10.3%. Increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds are the main factors that are weighing upon the company.
Let’s delve deeper and find out what’s going on with this Zacks Rank #3 (Hold) consumer staples stock.
Factors Affecting the Company
We note that Philip Morris has been experiencing lower volumes for the past few quarters primarily due to the general shift of consumption away from tobacco products. Although the company posted a positive surprise in third-quarter 2016, the average surprise in the trailing four quarters was a negative 3.8%. Further, cigarette shipment volumes fell 5.4% to 2.1 billion units in the third quarter, reported in Oct 2016, chiefly attributable to lower cigarette industry volume in Argentina, Indonesia, Philippines and Russia, as well as lower cigarette market share, notably in North Africa, Philippines and Russia.
Moreover, the company is losing share in Europe and the performance of Marlboro brand remains under pressure in the region. Further, the vapor category too did not perform as expected during the third quarter. The situation is not anticipated to improve soon and analysts are not bullish about the company as evident from the fact that they have moved their estimates downward significantly in the last 30 days.
PHILIP MORRIS Price, Consensus and EPS Surprise
PHILIP MORRIS Price, Consensus and EPS Surprise | PHILIP MORRIS Quote
Additionally, Philip Morris is facing competitive pressures from several local brands. These brands are cheaper and thus, negatively affect the company’s volume and sales. Such alternatives compel Philip Morris to keep its prices low, which consequently affect the margins.
Further, the tobacco industry faces many challenges which put margins under pressure. Governments worldwide are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. Such actions negatively impact margins of the company.
Nevertheless, we are encouraged that the company is focusing on less harmful tobacco products in order to cater to growing demand for low-risk, smokeless tobacco products. The company also has considerable presence in the unconventional tobacco products category. In Dec 7, 2016, it filed an application with the US Food and Drug Administration (FDA) for its IQOS products (Heatsticks that heat tobacco instead of burning it). Once the Modified Risk Tobacco Product (MRTP) claim is approved by FDA, the company will be able to enjoy a significant marketing advantage over other reduced risk tobacco products that are being sold currently.
Hence, we believe the concerns are transitionary in nature and will allow space for this company to rebound in the long run. Philip Morris has an expected earnings growth rate of 9% for the next five years.
Hence, we suggest investors to hold on to the stock and for the rest let's wait and watch.
Stock to Consider
Some better-ranked stocks in the broader consumer staples sector include Inter Parfums Inc. (IPAR - Free Report) , US Foods Holdings (USFD - Free Report) and Sysco Corporation (SYY - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Inter Parfums Inc. has an expected earnings growth of 15%. US Foods has an expected earnings growth rate of 17.1%, while Sysco Corporation has a long-term growth rate of 8.8%.
The Best Place to Start Your Stock Search
Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>