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Philip Morris Curtails View on Montreal Legal Proceedings

Zacks Equity Research

Philip Morris International Inc. PM trimmed its earnings view for 2019. The move came after the Court of Appeal in Montreal gave its punitive judgment against Rothmans, Benson & Hedges Inc., a subsidiary of Philip Morris. Let’s take a closer look at the latest development.

Lawsuit Leads to View Cut

The lawsuit is related to a trail in 2015, wherein the defendants — Rothmans, Benson & Hedges, Imperial Tobacco Canada Limited and JTI-Macdonald Corp — were accused for serious damages. On Mar 1, 2019, the court ruled against the defendants and as a result the parties involved are to bear a lumpsum amount as compensation.

As a result of this move, Rothmans, Benson & Hedges is required to deposit CAD 257 million, of which CAD 226 million had been earlier deposited as security. Thanks to such litigations, Philip Morris is likely to bear pre-tax charge of nearly $194 million in the first quarter of 2019.  Management will be assessing the developments associated with this case and has hence stated that the estimated charges are subject to changes in the future.

Consequently, the company curtailed its earnings view for 2019 to reflect the aforementioned legal expenses. The company currently expects reported earnings to be nearly $5.28 compared with the earlier forecast of $5.37. The revised earnings projection is based on the exchange rates as of Feb 7, 2019, when the company released fourth-quarter 2018 results. Excluding the impacts of unfavorable currency of approximately 14 cents and legal charges of 9 cents, earnings are projected to rise 8% year on year.

Wrapping Up

Apart from the adverse impacts of legal proceedings and currency, declining shipment volumes, especially for cigarettes, are a concern. In fact, management anticipates cigarette and heated tobacco shipment volumes to decline in the range of 1.5-2% in 2019.

Nevertheless, this Zacks Rank #2 (Buy) company expects to cushion these hurdles on the back of strong pricing strategies. Evidently, higher pricing in the combustible tobacco portfolio has been supporting performance for a while. Moreover, price hikes enable Philip Morris to maintain margins at the desired level. The company continues to expect pricing to remain a key growth driver in the near term.

Apart from this, growth in the heated tobacco products arena is an upside to the company’s performance. Rising health awareness have pushed consumers toward low-risk tobacco products. In fact, the company’s IQOS devices are among one of the leading reduced risk products (RRPs) in the industry. Going forward, the company expects consistent growth in IQOS and Heated Tobacco category and is on track with investments in the category.

To top these, this well-known tobacco player is likely to continue gaining from a strong brand portfolio, comprising renowned names such as Marlboro, L&M, Bond Street, Parliament, Chesterfield and Virginia Slims among others. Such aspects are boosting investors’ optimism on the stock that has gained 14.4% in the past six months, while the industry declined 3.5%.

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