Philip Morris International Inc. (PM) is set to report fourth-quarter 2014 results on Feb 5. Last quarter, the company delivered a positive earnings surprise of 4.5%. Let us see how things are shaping up for this announcement.
Factors at Play
We believe that it will be difficult for Philip Morris to surpass estimates in the fourth quarter. The company has been facing dwindling volumes due to declining demand as a result of the ongoing anti-tobacco campaigns. We expect the declining trend to continue in the fourth quarter as well thus putting pressure on both the top and bottom line.
To add to the woes, a strengthening dollar is creating negative foreign currency impact for Philip Morris which generates significant revenues from its international operations.
Moreover, higher excise taxes, and packaging and advertising restrictions imposed by governments on tobacco companies are putting pressure on Philip Morris’ margins.
This has resulted in a pricing war among tobacco companies and significant cut in prices of low and mid-range cigarettes. Moreover, the European Union has decided to make plain packaging mandatory for tobacco manufacturers, similar to governments of several other countries.
The ongoing currency headwinds and difficult pricing environment prompted Philip Morris to cut the 2014 outlook on Oct 16.
Earnings Whispers
Our proven model does not conclusively show that Philip Morris International is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 to surpass earnings estimate. However, that is not the case here due to the following factors:
Zacks ESP: ESP for Philip Morris is 0.00% since both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.06 per share.
Zacks Rank: Philip Morris has a Zacks Rank #4 (Sell).
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some other consumer staples companies that investors may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Bebe Stores Inc. (BEBE), with an Earnings ESP of +50.00% and a Zacks Rank #1 (Strong Buy).
Reynolds American Inc. (RAI), with an Earnings ESP of +1.15% and a Zacks Rank #2 (Buy).
Dr Pepper Snapple Inc. (DPS), with an Earnings ESP of +5.75% and a Zacks Rank #3 (Hold).
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