Quick Thoughts – PM Investor Day, Revised Guidance

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In conjunction with the company’s investor day, PM offered revised 2014 EPS guidance:

  • EPS in the range of $4.87 to $4.97 versus a prior estimate of $5.09 to $5.19;
  • The lowered guidance ($0.22 per share at both the high and low-end) is a function of a charge related to discontinuing cigarette production in the Netherlands ($0.24 per share) as well as a lower than expected asset impairment charge ($0.02 per share) related to cessation of cigarette production in Australia;
  • Currency remains a headwind, but at the same order of magnitude as the company’s prior guidance ($0.61 per share, unfavorable);
  • So, no discrete change to the company’s operating EPS guidance (6-8% EPS growth, currency neutral)

Having said that, the language around the 6-8% growth bogey has become less confident, with the prior language of:

“Based on our expectation of robust pricing, market share growth momentum and early signs that the operating environment is improving in Europe, combined with our continued investments for the long-term, we remain confident in our constant-currency adjusted diluted EPS growth rate of 6%-8% for this year.”

Replaced with:

“We continue to face significant currency headwinds, an improving but weak macro-economic environment in the EU and known challenges in Asia, partly offset by a robust performance in a number of markets and the contribution of our business development initiatives. Furthermore, we have recently witnessed significant price discounting at the low end of the market in Australia which, were it to persist, could lead us to be at the lower end of our 2014 guidance for full-year currency-neutral adjusted diluted EPS growth of 6%-8%.”

Practically (but not technically), the company backed off its long-term EPS growth algorithm of 10-12%;

  • “As of 2015 and for the near term, the company targets ex-currency adjusted diluted EPS growth in the range of 8%-10%;
  • A return to the long-term algorithm will need to come from the contribution of new products – “Within the next three to four years, the company anticipates that its Reduced-Risk Products will become accretive to its bottom line and then will represent an upside to all the metrics of its growth algorithm, including volume.”
  • In our view, there weren’t a whole lot of investors that still embraced the 10-12% EPS growth bogey (we didn’t), and the new target is consistent with industry peer BAT and should be consistent with investor expectations as well, based on our conversations;
  • In fact, we prefer that the band aid has come off an unrealistic growth target that, at this point, was likely doing more harm than good with investors.

Where does that leave us?  The company maintained operating guidance, but with a “watch out” and lowered a growth target that very few investors believed in at this point.  We would be more concerned about the change in the EPS growth algorithm if PM’s share price were discounting the more aggressive level of EPS growth (it isn’t, as our analysis yields an implied growth rate of just about 7% for PM, so still below even the revised EPS growth profile)  The stock has moved off its highs, and will almost certainly be lower today, but, make no mistake, it is well off its lows as well, and continues to offer one of the more compelling risk/reward profiles in large cap staples.  PM remains squarely on our preferred list.

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