Quick Thoughts – PM Q1 EPS

nicklipinski

This morning, PM reported Q1 ’14 EPS of $1.19 per share, besting consensus estimates by $0.03 – we would characterize the quality as somewhat mixed (certainly not as strong as Q4 ‘13), but our view on PM is unchanged given what we see as one of the best risk/reward profiles in consumer staples, well-supported by a dividend yield of 4.4% and robust FCF.

  • Importantly, PM broke the recent cycle of negative EPS revisions, maintaining expectations for adjusted (excluding currency and charges) EPS growth of 6-8% for 2014.  Guidance on reported EPS improved by $0.07 per share ($0.10 more favorable currency, $0.03 in charges).  We tend not to get too bent out of shape on currency (in either direction), but it appears as if some of the pressure that we saw on reported EPS in ’13 is abating.
  • Currency drove most, if not all, of the ’13 negative EPS revisions even as the underlying business continued to deliver against plan – with currency moving to more of a tailwind (less of a headwind is technically more correct) in ’14, it would strike us as very odd for investors to now say, “It’s just currency”.
  • We continue to see sentiment as mixed, at best (just based on conversations we would tend more toward decidedly negative, but we don’t talk to everyone) and this quarter almost certainly isn’t the catalyst for investors to climb over the wall of worry.

The company’s reported 4.4% volume decline (against the easiest volume comparison of the year) may drive the stock reaction today.  The volume weakness was across multiple regions, but the company did suggest that the unfavorable timing of inventory movements in the quarter represented 2.4% of the volume decline.  Our main concerns with respect to volume weakness are Russia and Indonesia, but we are encouraged by the commentary suggesting early signs of improvement in the operating environment in Europe.  Our expectation is that volume trends will strengthen as we move through the balance of ’14.

Driven by the volume decline, constant currency organic revenue growth of -1.6% was disappointing, but the company was against the most difficult comparison of the year as pricing was nearly +10% in the first quarter of ’13.  Comparisons ease as we move through the balance of ’14.  Constant currency EBIT declined in the quarter as well (-3.1%), a contrast to the excellent currency neutral operating leverage that we saw in Q4.

We expect some small, positive adjustments to consensus estimates based on these results driven primarily by currency and continue to see PM as one of the better ideas in consumer staples across multiple durations.  The company is poised to deliver 6-8% currency neutral EPS growth in an investment year and while we appreciate the concerns investors may have regarding the company’s ability to return to its prior 10-12% EPS growth algorithm, we would argue that the current dividend yield and FCF profile make for an engaging investment case even if long-term growth is impaired, with investors essentially getting an inexpensive option on a return to prior growth rates.

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