Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



1 Dumb Reason and 1 Smart Reason to Sell Philip Morris

Source: Philip Morris.

Philip Morris (NYSE: PM  )  stock fell 2.7% last week as investors reacted with pessimism to the company's reduced earnings guidance for the current year. Lower earnings due to one-time charges and transitory factors are no sound reason to sell a stock. On the other hand, the company and competitors such as British American Tobacco (NYSEMKT: BTI  ) and Altria (NYSE: MO  ) are operating in a declining industry, so investors may want to be very careful when considering investment decisions in the sector.

A dumb reason to sell
On June 26, Philip Morris said it expects full-year earnings per share of $4.87 to $4.97 per share, versus a prior forecast in the range of $5.09 to $5.19.

This adjustment was due to a combination of factors, including asset impairments and exit costs related to ending production of cigarettes in Australia and the Netherlands. In addition, unfavorable currency fluctuations are expected to have a big negative impact of $0.61 per share during the year.

CEO Andre Calantzopoulos admitted in the earnings press release that the company is going through a challenging period: "We continue to face significant currency headwinds, an improving but weak macro-economic environment in the EU and known challenges in Asia, partly offset by a robust performance in a number of markets and the contribution of our business development initiatives."

It's never nice to see a company cut guidance. Investors can always wonder if downward adjustments to earnings are a transitory setback or a sign of continued weakness.

However, Philip Morris is maintaining its forecast for sales and earnings growth in 2015 and beyond. During 2015 and in the medium term, management expects currency-neutral revenues to increase by 4% to 6% annually, and diluted earnings per share are forecast to grow between 8% and 10% per year.

Selling a company because of the negative impact from currency fluctuations and operations restructuring is clearly a shortsighted reaction, and long-term-oriented investors have valid reasons to consider that the recent weakness in Philip Morris may represent a buying opportunity.

A declining industry
None of this means the company and its peers are solid long-term bets. On the contrary, tobacco is a declining business, and there is no reason to expect any reversal in the trend over the coming years.

Philip Morris delivered a 4.4% year-over-year decline in cigarette shipment volume during the first quarter of 2014, to 196 billion units. Revenue fell 8.8% to $6.9 billion, while revenue excluding currency fluctuations declined by 1.6%. The company reported a 7.8% year-over-year decline in earnings per share, from $1.28 in the first quarter of 2013 to $1.18.

Much the same goes for competitors British American Tobacco and Altria. Declining tobacco sales are a pervasive factor across the industry, so it's not like these companies can materially improve their situation by gaining share versus the competition. A growing share of a declining pie is better than a shrinking share of that same pie, but that does not make it a smart proposition for investors.

British American Tobacco announced a 1.2% decline in tobacco sales volume during the first quarter in 2014: 164 billion units versus 166 billion units in the first quarter of 2013. Volume in the Asia-Pacific region increased from 48 billion to 50 billion units, but the company suffered volume declines in the rest of its markets.

Sales volume in the Americas fell from 32 billion to 31 billion units, Western Europe volume declined from 26 billion to 24 billion units, and the Eastern Europe, Middle East, and Africa region delivered a decline in volume from 54 billion to 53 billion units.

Altria announced a 2.5% decline in cigarette volume during the first quarter in 2014, to 28.75 billion units. Sales of Marlboro products fell 2.4% to 24.8 billion, while other premium brands declined by 8.6% to 1.6 billion. However, discount cigarette sales increased 0.9% to 2.3 billion. Total revenue fell 0.2% versus the same period in the prior year, to $5.5 billion.

Philip Morris, British American Tobacco, and Altria are resorting to price increases to buffer the impact of declining sales volume, while cost reductions and share buybacks are helping when it comes to earnings per share. However, these strategies can only go so far; at the end of the day, these companies are still operating in a waning industry, and that's a major risk for investors.

Foolish takeaway
Selling Philip Morris because of the recently reduced earnings guidance doesn't make much sense, since it's mostly based on outside factors and one-time events. However, declining sales volume across the industry is a big reason for concern regarding the company as an investment. There you have it: one dumb and one smart reason to avoid Philip Morris.

Top dividend stocks for the next decade
Philip Morris' dividend is attractive to many investors. That's because the smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2014, at 6:11 PM, LoRiskThisYear wrote:

    I just got back from three weeks in Italy. My top memory after a week in Florence, a week in Venice and a week on a boat in the Venice Lagoon is... cigarette smoke. Everywhere. Cooks standing in the doorways of their restaurants smoking. People on the street. God, being in a crowd outdoors is toxic (at least they have banned indoor smoking).

    It's going to be awhile before cigarettes go away in southern Europe. Not until the current generation dies off at least. By that I mean 20 somethings. EVERYONE in Italy smokes! "Tabachis" on every corner. Awful! I don't think I'll sell my PM yet...

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3016515, ~/Articles/ArticleHandler.aspx, 8/29/2015 3:25:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:03 PM
PM $80.35 Down -0.43 -0.53%
Philip Morris Inte… CAPS Rating: ****
BTI $107.22 Up +0.15 +0.14%
British American T… CAPS Rating: *****
MO $54.17 Up +0.46 +0.86%
Altria Group, Inc. CAPS Rating: ****