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Why Is Philip Morris (PM) Down 3.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Philip Morris (PM - Free Report) . Shares have lost about 3.6% in that time frame, underperforming 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 catalysts.

Philip Morris Q1 Earnings Top, View Reflects Coronavirus Woes

Philip Morris reported first-quarter 2020 results. Adjusted earnings per share of $1.21 came ahead of the Zacks Consensus Estimate of $1.13. The bottom line grew 11% year over year. On a like-for-like (LFL) basis, after excluding currency, the bottom line surged 30.1%.

Net revenues of $7,153 million beat the Zacks Consensus Estimate of $6,737 million. The top line grew 6% in the reported quarter. Net revenues, on an LFL basis and excluding currency headwinds, advanced 10%. This was backed by a favorable pricing variance and improved volume/mix. During the quarter under review, revenues from combustible products rose 1.6% to $5,598 million due to growth in most regions. Further, revenues in the RRPs improved 25.1% to $1,555 million. Total cigarette and heated tobacco unit shipment volumes dropped 1.2% to 173.7 billion units. Cigarette shipment volumes fell 4% to roughly 157 billion units in the quarter, while heated tobacco unit shipment volumes of nearly 16.7 billion units surged 45.5% year over year.

Adjusted operating income grew 11.4% to reach $2,789 million. On an LFL basis, after excluding currency, adjusted operating income improved 25.5% year over year. Adjusted operating margin expanded 1.9 points to 39%. Adjusted operating margin grew 5.1 points to 41.3% on excluding currency and on an LFL basis.

Region-Wise Performance

Net revenues in the European Union increased 17.4% to $2,535 million. Revenues grew 20.7% at cc, courtesy of favorable pricing and volume/mix. Total shipment volumes in the region rose 8.4% to 45,307 million units. In Eastern Europe, net revenues grew 36.1% to $788 million and 35.1% at cc. The upside can be attributed to favorable pricing and volume/mix. Total shipment volumes grew 17.9% to 25,785 million units. In the Middle East & Africa region, net revenues declined 5.5% (down 5.3% at cc) to $876 million due to adverse volume/mix, partly made up by favorable pricing. Further, total shipment volumes fell 10.5% to 30,466 million units.

Revenues in South & Southeast Asia rose 12.4% (up 10.7% at cc) to $1,251 million. The upside was driven by favorable pricing variance, partly offset by adverse volume/mix. Shipment volumes declined 9.4% to 37,595 million units. Revenues from East Asia & Australia fell 5% (down 4.3% at cc) to $1,255 million due to unfavorable volume/mix, partly compensated by pricing gains. Total shipment volumes climbed 2.4% to 19,421 million units. Finally, revenues from Latin America & Canada decreased 31.3% (down 28.5% at cc) to $448 million due to adverse volume/mix, somewhat negated by improved pricing. Moreover, total shipment volumes declined 14% to 15,171 million units.

Other Financials & Developments

The company ended the quarter with cash and cash equivalents of $3,746 million. Also, it had long-term debt of $24,999 million and shareholders’ deficit of $11,063 million. During the quarter, Phillip Morris announced a quarterly dividend of $1.17 per share. Also, on Mar 30, the company submitted a supplemental premarket tobacco product application (PMTA) with the U.S. Food and Drug Administration for the IQOS 3 tobacco heating device. 

The company delivered a solid first-quarter show, reflecting continued momentum in the smoke-free portfolio along with efficient combustible tobacco pricing. The impact of COVID-19 on the first-quarter performance was limited as it was in the early stages. However, management expects the coronavirus to have detrimental impacts on its 2020 performance. The company expects to be hurt by lower duty-free sales on account of travel restrictions. Also, with regard to the IQOS user acquisition, Phillip Morris is unable to engage with adult smokers through sales forces and retail touchpoints owing to restrictions associated with the lockdown. Though the company is utilizing digital tools, it expects the rate of new IQOS user acquisition to decline. Further, the delay in the enforcement of minimum price in Indonesia due to coronavirus-led restrictions is likely to affect the business. Apart from this, soft consumer spending resulting from unemployment may also disrupt market dynamics for a temporary period.

Given the uncertainty surrounding the severity and duration of the pandemic, management withdrew its bottom-line guidance for 2020 that was provided on Feb 6. The company has instead offered second-quarter guidance. Notably, Phillip Morris has taken several measures to keep the business going and minimize disruptions. The company is getting adequate access to inputs for its products. Most of its manufacturing facilities globally are currently running, including all heated tobacco unit factories. Some cigarette production facilities have been temporarily affected by government-imposed shutdowns or production limitations. They form about 20% of the company’s total cigarette production capacity globally. Nonetheless, the company has an adequate inventory of finished products and doesn’t expect an out-of-stock situation in any key operating income region. Certain emerging markets may face temporary out-of-stock situations, in case of infrastructure-related hurdles. Additionally, the company has been undertaking measures to strengthen its financial position. 

Phillip Morris was anyway expecting a soft second-quarter show due to tough year-over-year comparisons, certain costs and unfavorable dynamics in Indonesia. Management now expects a further dismal performance due to the impacts of COVID-19. In fact, the second quarter is likely to bear the largest quarterly impact of coronavirus this year. In the second quarter, currency-neutral revenues are expected to fall 8-12% due to coronavirus-led hurdles, including reduced IQOS sales. Further, management expects earnings in the second quarter between $1 and $1.10 per share, including currency headwinds of about 12 cents per share. Earnings are expected to bear the brunt of distributor and trade inventory movements, lower duty-free sales and delay in minimum price enforcement in Indonesia.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -24.68% due to these changes.

VGM Scores

At this time, Philip Morris has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 these revisions indicates a downward shift. It's no surprise Philip Morris has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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