Philip Morris: What I'm Watching

Summary

• Analysts expect top and bottom line growth.
• How much has the currency situation changed?
• What are debt maturity plans?

Shares of cigarette giant Philip Morris (NYSE:PM) have done quite well over the past year. A weakening dollar has improved sentiment around this international name, while the company continues to grow its reduced risk product portfolio. Next week, on July 20th, we will see how the company did in the second quarter of 2017. Here are some key items I'm watching currently for the company and the stock.

If we look at overall estimates, the Street is expecting a fair amount of growth from Philip Morris. Analysts think the company will report net revenues of $7.08 billion, 6.5% growth from the year-ago period. On the bottom line, the Street expects adjusted earnings per share of $1.23, which would be up 8 cents from last year's Q2 period.

In the past couple of years, a much stronger US dollar has really hurt the company's results. This year, the dollar currency index has pulled back a bit, primarily thanks to the strength of the Euro. However, we've seen strength in recent months from the Japanese Yen (the company is hedged a bit), Russian Ruble, and Argentinian Peso. At the Q1 report, the company was expecting an 8-cent per share hit this year to earnings, so we'll have to see how much that forecast has changed. Here's the Q1 forecast for overall earnings:

PMI increases, for a favorable discrete tax item of $0.04 only, its 2017 full-year reported diluted earnings per share to a range of $4.84 to $4.99, at prevailing exchange rates, versus $4.48in 2016. Excluding an unfavorable currency impact, at prevailing exchange rates, of approximately $0.08 for the full-year 2017, as well as the tax item of $0.04 recorded in the first quarter, the forecast range represents a projected increase of approximately 9% to 12% versus adjusted diluted earnings per share of $4.48 in 2016.

Bottom line reported earnings are key because they are a major driver of the company's cash flow. Philip Morris is expected to generate approximately $7 billion of free cash flow this year, while total dividend payments at the current level are around $6.5 billion annually. That doesn't leave too much room for more increases, so it is important to note any changes in the earnings forecast.

Additionally, I'll be looking at management commentary regarding changes in the capital expenditure forecast, like capex used for the IQOS platform. If cash flow is expected to be a few hundred million more or less than that $7 billion level, it could have a huge impact on the potential dividend raise this year. I'll have more on the dividend next month.

In terms of the overall business, the company said in its Q1 earnings release that 1.8 million consumers have effectively stopped smoking by switching to the heat-not-burn alternative IQOS. As a result, cigarette shipment volume was down 11.5% over the prior year period, but heated tobacco products saw volumes surge more than 10 times from Q1 2016.

Investors will be watching those key numbers in Q2, as well as the company's pricing variance. In Q1 2017, raising prices added $408 million to revenues, a key reason why reported results weren't much worse. A significant portion of the expected Q2 revenue growth will come from the pricing variance.

One key item I'm curious about, although I'm not sure if we'll get any color on from management, is the plan for upcoming debt maturities. Three of the company's outstanding debts come due during the remainder of this year, with two of those being next month. With the company having $26 billion of net debt at the end of Q1, I'm expecting a refinance, but that likely means higher rates due to the recent rise in treasury yields, like the 10-year. If Philip Morris must refinance at higher rates than management previously thought it could get, it would lower earnings and cash flow discussed above.

Currently, Philip Morris shares trade for more than $118 per share, the upper end of the $87 to $124 (both rounded) range. While every earnings report is important, the stock is in a very interesting spot on a technical basis. Shares are only about a dollar away from their 50-day moving average. A good report would send shares above that level, likely leading to the next leg of the rally. However, a bad report could send shares and the 50-day trending lower, with the next major support level of the 200-day coming at $109 (but rising by the day). I'll return after earnings with my analysis of the Q2 period.

Analyst’s 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.

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