Philip Morris: A Necessary Pullback?

| About: Philip Morris (PM)
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Summary

Company missed on top and bottom lines.

Yearly forecast was maintained.

Debt situation reflects higher rates.

Thursday morning, shares of cigarette giant Philip Morris (NYSE:PM) saw their biggest decline in some time after the company's first quarter earnings report. While management said that the weaker period was in line with results, top and bottom line numbers missed Street expectations by a sizable amount. With shares rallying quite a bit this year, the results weren't enough to keep the stock going.

For the quarter, net revenues came in at $6.06 billion, missing Street expectations by more than $400 million - the largest top line miss in a number of years. Additionally, the company's adjusted profit missed by a nickel per share after excluding a one-time tax item. Overall, cigarette shipment volume was down by more than 11%, due to timing impacts and low price brands in certain markets.

While the quarter was weaker than the Street forecast, management maintained its yearly earnings forecast when excluding the discrete tax item. Additionally, since the Q4 report, currency issues have decreased, resulting in a dime per share boost to the EPS forecast for the year. Philip Morris revenues, earnings, and cash flows have been hit quite dramatically in recent years by a stronger dollar, but for now, this problem has diminished quite a bit.

In regards to the balance sheet, the company did take on a bit of new debt during the period, with the net debt amount rising by almost $1.5 billion. This is likely due to the fact that three bond issues mature by the end of the year. Unfortunately, this move that is likely refinancing did come at higher rates, primarily thanks to the Fed's rate hike late last year. This will mean higher interest costs moving forward. Further interest rate increases are worrisome for a company with more than $26 billion in net debt.

In the end, Philip Morris' Q1 results were weaker than expected, but at least, management maintained its yearly forecast. Shares are down more than $4 on the news, primarily because they've rallied so much in recent months as seen in the chart below. For investors that didn't want to buy at all-time highs, this pullback may provide to be a nice opportunity. The only caution I have at the moment is that this decline has put shares just below their 50-day moving average, which may result in some more selling if shares cannot stay above this key technical support level.

(Source: Yahoo! Finance)

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