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Philip Morris Beats, Tightens Guidance: Staple ETFs in Focus

Zacks Equity Research
With Philip Morris (PM) outriding Q1 estimates, we discuss the market impact on some consumer staple ETFs with high-exposure to this tobacco company.

Philip Morris International Inc. PM reported first-quarter 2019 results on Apr 18, before the market opened. Earnings topped estimates on continued demand for smoke-free products, improved net shipment volumes and encouraging rise in global sales.

However, the company has lowered its earnings guidance for 2019. Post the earnings release, Philip Morris’ shares declined about 1.4% to close at $84.29 on Apr 22.

Q1 in Detail

Philip Morris reported adjusted earnings per share (EPS) of $1.09, beating the Zacks Consensus Estimate of 99 cents. The bottom line improved 9% year over year.

Net revenues of $6,751 million surpassed the Zacks Consensus Estimate of $6,735 million. However, the top line declined 2.1% year over year. Nevertheless, the metric rose 3.2% at constant currency (cc), backed by favorable pricing across most regions. Sluggish revenues from combustible products across all the regions, except South & Southeast Asia, affected the top-line numbers.

Adjusted operating income went up 3.2% (up 9.1% at cc) year over year to $2,503 million.

Shipment Volume

The company’s total cigarette and heated tobacco unit shipment volume inched up 1.1% to 175.8 billion units. While cigarette shipment volume was flat at 164.3 billion units in the first quarter, heated tobacco unit shipment volume of almost 11.5 billion units showed a rise of 20.2% year over year.

Shipment volumes in the European Union, Middle East & Africa and South & Southeast Asia regions rose 2.9%, 13.7% and 3.2% year over year, respectively. Meanwhile, there was a decline in shipment volumes in the Eastern Europe, East Asia & Australia and Latin America & Canada regions.

Outlook Revised

Philip Morris revised outlook for 2019. Earnings are now expected at $4.87 compared with the earlier forecast of $5.28. Adjusted earnings are estimated to be around $5.09, suggesting growth of almost 5.7% from the year-ago reported figure. Excluding the impact of unfavorable currency of approximately 14 cents, earnings are projected to rise at least 8% to reach $5.23.

ETF Impact

The consumer staples ETFs having notable exposure to Philip Morris seemed to have benefited on Apr 18 (see all Consumer Staples ETFs here).

Fidelity MSCI Consumer Staples Index ETF FSTA

This fund offers exposure to the Consumer Staples sector of the United States at a very low expense ratio. It has AUM of $485.5 million and charges a fee of 8 basis points a year. From an industry exposure look, Beverages, Household Products and Food & Staples Retailing have the highest exposure to the fund, with 24.3%, 21.7% and 20.4% allocation, respectively. It has a 6.95% exposure to Philip Morris. The fund has returned 12.3% in a year and 12.1% year to date.

Following the earnings release, the fund has declined about 0.06% to close at $34.18 on Apr 22.  FSTA has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook (read: Wal-Mart's Solid Q4 Results Drive Consumer ETFs Higher).

Vanguard Consumer Staples ETF VDC

This fund is one of the most popular funds in the Consumer Staples sector of the United States. It has AUM of $4.72 billion and charges a fee of 10 basis points a year. From a sector look, Household products, Soft drinks and Packaged Foods & Meats have the highest exposure to the fund, with 21.8%, 19.5% and 16.8% allocation, respectively. It has 6.39% exposure to Philip Morris.

The fund has returned 12% in a year and 11.9% year to date. Following the earnings release, the fund has declined about 0.15% to close at $146.58 on Apr 22. VDC has a Zacks ETF Rank #1, with a Medium risk outlook (read: PepsiCo at All-Time High Post Earnings: Staples ETFs in Focus).

iShares U.S. Consumer Goods ETF IYK

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. It has AUM of $464.6 million and charges a fee of 43 basis points a year. From a sector look, Food Beverage Tobacco, Household & Personal Products and Consumer Durables have the highest exposure to the fund, with 45.7%, 21.4% and 16% allocation, respectively. It has an exposure of 6.05% to Philips Morris.

The fund has returned 6.5% in a year and 14.9% year to date. However, the fund has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook. Following the earnings release, the fund has declined about 0.29% to close at $121.82 on Apr 22.