Philip Morris: Why Are You Surprised By This?

| About: Philip Morris (PM)
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Summary

Shares are up strong since December.

A recent pullback is upon us following Q1 earnings.

A discussion of performance and future expectations.

I initiated coverage of Philip Morris International (NYSE:PM) at $85.50 in fall of 2015. Since then shares are up 25%, but the name has had its ups and downs, allowing for strong add on opportunities as well as trading potential. The stock has pulled back about 5% from its recent highs, so is this another opportunity? Well, I would like to see it fall more before adding, but I think the pullback was necessary after rising $30 a share since December. Part of the spike in share prices was rampant speculation that the company might by Altria (NYSE:MO) in a mega-merger. While that speculation led to trading, there was also a guidance update in February that led to more buying, as well as reports of strong demand for smokeless tobacco and new electronic nicotine products.

That all said, I am revisiting the name because it has pulled this week, and there is a dichotomy growing between the bulls and bears on this name. To understand if it is time to do some buying or if you should consider steering clear, barring the notion of no longer selling traditional cigarettes, let us look into the performance of the name. The company has recently reported its Q1 so let's discuss.

The quarter was bad on the surface. I've seen the tweets, and the forum posts. So many are surprised by this. But why? I have been bullish in the face of sales pressure. As you know, I recommend holding a core position that you add to on dips, and sell some when the stock gets ahead of itself a bit. Hopefully, you took some off the table over $110. Now that shares have taken a bit of dive following this perceived weak quarter, should you consider adding or waiting for a further pull back? Well, I think the answer may be the latter of course as I said in the opening. But why? Performance just is not there, but the company is working to evolve and keep the revenue streams coming in, while maintaining a very shareholder friendly environment. The company has seen better days in terms of growth, but it is by all means a value, dividend play, especially under $100. But let's take a good look at sales as well as discuss future expectations.

In its most recent quarter, the company took in revenues that were down 0.3% year-over-year to $6.06 billion. For years the company has seen trouble on the revenue side, either flat or down in many cases. So this result is unsurprising to be honest, although the degree of the miss versus analyst estimates was astounding in my opinion. It missed by $410 million. That is a sizable whiff. However, this company is one that was getting burnt by currency issues. Thus, what I think is prudent is to control for this impact to understand the real changes in revenues from a company operating standpoint. If we exclude the unfavorable currency impact and look at revenues in constant dollars, we see a negative hit of $120 million due to currency issues. So, controlling for this, revenues were up 1.7% year-over-year. Much of this was due to pricing. That said, cigarette shipment volume was down 11.5% year-over- year. That is huge. Factoring in expenses, the company saw earnings of $1.02, up 4.1% from last year's Q1. However, if we factor in special items and look at a constant dollar basis, earnings per share were flat versus last year, hitting $0.98 per share, and missing estimates by $0.05.

These results suggest the company continues to make money, but is continuing to stagnate. That is the risk to this company, the fact that public health entities everywhere are battling tobacco. That said, hundreds of millions of people globally utilize the products. Shifting from traditional tobacco into 21st century means is what will keep sales coming in. The company is heavily focused on consumers switching from the classic tobacco products to those that heat as opposed to burn. Looking ahead, the company sees 2017 reported earnings per share forecast to be in a range of $4.84 to $4.99. This represents a projected increase of approximately 9 to 12% versus 2016 earnings. While it is encouraging to see earnings projected to rise, sales continue to stagnate, and operating income has been pressured. With this outlook, I think it is prudent to let shares fall back before doing more buying.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.