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Philip Morris Slips to Strong Sell

Zacks Equity Research

Zacks Investment Research downgraded Philip Morris International Inc. (PM) to a Zacks Rank #5 (Strong Sell) on Jan 6 due to a significant foreign exchange drag estimated for fiscal 2013.

Why the Downgrade?

Philip Morris witnessed sharp downward estimate revisions after reporting lower-than-expected third-quarter 2013 results.

Although the Marlboro owner reported decent earnings of $1.44 per share beating the Zacks Consensus Estimate by 0.7% and the prior-year earnings by 4.3%, revenues missed the estimate due to higher-than-expected unfavorable foreign exchange impact and 6% decline in volume.

Moreover, gross profit declined 0.5% from the prior-year quarter to $5.3 billion, mainly due to higher excise tax faced by the company during the quarter. Operating income slipped 1.0% year over year to $3.7 billion during the quarter due to higher marketing, administration and research costs.

Philip Morris estimates a stronger currency headwind in the upcoming quarter and raised currency impact to 33 cents per share for fourth quarter 2013 from 31 cents per share announced previously.

Almost all the estimates were revised downward following the cautious outlook of the company. The Zacks Consensus Estimate for fourth-quarter 2013 slipped 9.2% to $1.28 per share over the last 60 days. For 2013, the Zacks Consensus Estimate slipped 0.4% to $5.41 per share.

Moreover, the company is facing difficult industrial conditions due to declining demand owing to ongoing anti-tobacco campaigns. Governments around the world are hiking excise tax on cigarettes and imposing packaging and advertising restrictions on cigarette makers.

In Nov 2013, Philip Morris announced that it is going to foray into the e-cigarette category. However, recent developments in European Union, such as a probable restriction on the sale of e-cigarettes, are a concern.

Other Stocks to Consider

Some better-ranked tobacco companies include Altria Group Inc. (MO) and Lorillard Inc. (LO). While Altria carries a Zacks Rank #1 (Strong Buy) Lorillard carries a Zacks Rank #2 (Buy). Another consumer staple company worth considering is Green Mountain Coffee Roasters Inc. (GMCR) which carries a Zacks Rank #2.

Read the Full Research Report on MO
Read the Full Research Report on PM
Read the Full Research Report on LO
Read the Full Research Report on GMCR

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