Pressed by a weak tobacco business, the company has recently reduced its earnings guidance for fiscal year 2014. Following the cut in the outlook, the company’s share prices have plunged roughly 5% in a little over the past week.
Philip Morris Lowers Earnings Forecast
The company has reduced its earnings per share (EPS) forecast for fiscal year 2014 from a range of $5.09 to $5.19 to a new range of $4.87 to $4.97. Weak macroeconomic environment in the European Union, rising illicit trade in Asia, costs related to restructuring and higher excise taxes are some of the factors that have prompted the company to lower its outlook.
The company however expects its EPS to grow by 6% to 8% this fiscal year excluding asset impairment and exit cost charges related to the discontinued cigarette production in the Netherlands in 2014 and an unfavorable currency impact.
Higher excise taxes on cigarettes and advertising restrictions on cigarette makers have led to a pricing war. Philip Morris is facing stiff competitive pressure from several local brands in key markets such as Japan’s Melvis Cut and Philippines brands like Mighty and Marvel.
Besides closing its Netherlands plant, the company has recently relocated its six decade old manufacturing plant from Australia to South Korea on account of dwindling volumes (read: 2 Recession Proof Sector ETFs for This Stormy Market).
In the face of a softening tobacco business, the company has been planning new investments in order to diversify its product portfolio. Philip Morris plans to roll out its Marlboro Architecture 2.0 and is also undergoing several restructuring programs to facilitate the launch of its ‘Next Generation Products (NGP)’ in fiscal 2015.
For fiscal 2015, Philip Morris expects adjusted earnings growth in the range of 8–10%.
Not only has Philip Morris underperformed its peers in the past week, it has also been a laggard in the year-to-date frame. The company has posted a negative 2% return this year, as compared to a 10% return by Altria and a roughly 22% gain by Lorillard and Reynolds American each.
Weak performance by Philip Morris is expected to put some downward pressure on Consumer Staples ETFs that are heavily invested in the cigarette giant. This is all the more true as the company currently has a Zacks Rank #4 (Sell) and falls in a poor industry category. This portends downside movement in PM’s share price and the following ETFs in the coming weeks:
Consumer Staples Select Sector SPDR (NYSEARCA:XLP) – PM has 7.9% Allocation
This fund is the most popular product within the Consumer Staples equities space, having an asset base of $6.6 billion. The fund tracks the S&P Consumer Staples Select Sector Index and holds a small basket of 42 stocks.
The fund has the largest exposure to Procter & Gamble Company, followed by Coca-Cola and Philip Morris. The trio has a roughly 30% allocation in the fund.
The fund nicely diversifies itself among different industries such as Food & Staples Retailing, Household Products, Beverages, Food Products and Tobacco.
The fund is one of the cheapest in the category with 18 basis points as expenses and has returned a modest 5% since the start of the year.
XLP currently carries a Zacks ETF Rank #4 or Sell rating.