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Philip Morris International (PM) Plunges: Time to Buy the Dip?

By Leo Sun – Updated Apr 22, 2018 at 5:50PM

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The tobacco giant’s decline resets its valuation, yield, and expectations to more reasonable levels.

Shares of Philip Morris International (PM -4.18%) plunged 16% on April 19, after the tobacco giant posted a mixed first quarter. That miss rattled the entire tobacco sector and dragged down Altria (MO -3.67%), British American Tobacco (BTI -5.84%), and Imperial Brands (IMBB.Y -5.68%).

Some of the industrywide sell-off was justified, since PMI is the second largest publicly traded tobacco company and a bellwether stock. However, the sell-off also boosted PMI's yield and lowered its valuation to more attractive levels. So, should investors consider PMI's post-earnings dip to be a buying opportunity?

A man breaks a cigarette.

Image source: Getty Images.

First, the bad news...

PMI's revenues (excluding excise taxes) rose 13.7% annually to $6.89 billion, but it missed expectations by $100 million. This marked the third time it missed top-line estimates over the past four quarters.

PMI's combined cigarette and heated tobacco shipment volumes fell 2.3% annually during the quarter, missing expectations for a 1% dip. Cigarette shipments, which still account for the lion's share of the total, fell 5.3% with declines across all regions except South and Southeast Asia. Shipments of PMI's two biggest brands -- Marlboro and L&M -- both declined.

A "no smoking" sign on a table.

Image source: Getty Images.

Shipments fell by double-digits in Eastern Europe and East Asia & Australia, and by the single-digits in the European Union and Latin America & Canada. PMI noted that shipments in France, Germany, Poland, Russia, Ukraine, Saudi Arabia, and Algeria were particularly weak. It also noted that soft demand in Indonesia -- once a major growth market -- offset its growth in Pakistan and Thailand in South Asia.

Shipments of PMI's iQOS heated tobacco products -- which heat instead of burn tobacco "sticks" -- more than doubled, but they still only accounted for 5.5% of PMI's combined cigarette and heated tobacco shipments.

PMI's revenues were also boosted by a soft dollar. Its total revenues would have only risen 8.3% (versus 13.7% in dollars) on a constant currency basis. If the U.S. dollar rebounds, which could occur as interest rates rise, it will become a major headwind. The volatile dollar is also preventing PMI from repurchasing shares to boost its earnings.

Now, some good news...

Despite those challenges, PMI's adjusted diluted earnings rose 2% to $1.00 per share, which beat expectations by $0.10. But excluding a favorable currency impact of $0.03, its adjusted earnings actually declined 1% to $0.97 per share.

PMI also stated that a lower effective tax rate will help it grow its reported diluted earnings per share by 35% to 39% for the full year -- compared to its prior forecast for 34% to 38% growth. Excluding favorable currency tailwinds, that translates to 8% to 11% adjusted diluted EPS growth for the year, compared to its prior forecast for 7% to 10% growth.

PMI, like other tobacco companies, often hikes prices to offset lower shipments. That's why it still expects its revenue to grow 8% on a constant currency basis this year, which matches its forecast at the end of 2017.

PMI now trades at 16 times this year's earnings after its post-earnings plunge, compared to Altria's forward P/E of 15. Some analysts believe PMI could buy Altria, which spun off PMI in 2008, to counter British American Tobacco's takeover of Reynolds American. If that happens, PMI could evolve into a much larger company, but it would be exposed to new FDA regulations on the tobacco industry in the U.S.

Lastly, PMI's plunge boosted its forward dividend yield to more than 5%, climbing above Altria's forward yield. PMI has hiked that dividend every year since it split with Altria. This combination of a lower valuation and a higher yield should limit PMI's downside potential at these prices.

Why I like PMI

PMI is traditionally a good defensive stock for volatile markets, but the stock's valuation and yield had become historically unattractive prior to its post-earnings decline. But with the stock's valuation, yield, and expectations now reset to more reasonable levels, I think PMI is a worthy income play again -- despite all of the headwinds the tobacco industry still faces.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$91.79 (-4.18%) $-4.00
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$41.68 (-3.67%) $-1.59
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
$36.79 (-5.84%) $-2.28
Imperial Brands PLC Stock Quote
Imperial Brands PLC
$20.60 (-5.68%) $-1.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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