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Philip Morris Slips to Strong Sell; Cautious on FY Results - Analyst Blog

Zacks Equity Research

On Dec 26, Zacks Investment Research downgraded Philip Morris International Inc. (PM) to a Zacks Rank #5 (Strong Sell) after the company witnessed sharp downward estimate revisions in anticipation of soft fiscal 2014 results scheduled to be reported in Feb 2015.

Why the Downgrade?

Almost all the estimates were revised downward for the fourth quarter and fiscal 2014 over the past 30 days as the company expects industry headwinds to continue in the upcoming quarter. The Zacks Consensus Estimate for fourth-quarter 2014 slipped 1% to $1.07 per share over the last 30 days. For 2014, the Zacks Consensus Estimate declined by 2% to $5.07 during the same time frame.

During the third-quarter conference call, management lowered the fiscal earnings guidance anticipating currency headwinds to continue throughout the fiscal year. Philip Morris expects earnings in the range of $4.76 to $4.81 for fiscal 2014, lower than the previously guided range of $4.87 to $4.97. The lowered guidance range is also below last year’s earnings of $5.26 per share. 

Apart from currency headwinds, the company is experiencing declining demand for traditional tobacco products resulting from the ongoing anti-tobacco campaigns. Governments around the world are hiking excise tax on cigarettes and imposing packaging and advertising restrictions on cigarette makers. We believe that the declining trend in volume will continue during the fourth quarter as well.

Stocks to Consider

A better-ranked stock in the tobacco sector is Reynolds American Inc. (RAI) carrying a Zacks Rank #2 (Buy). Other well-positioned stocks in the broader retail sector are Columbia Sports Inc. (COLM) and G-III Apparel Inc. (GII) sporting a Zacks Rank #1 (Strong Buy).

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