I thought on would post this on MO board because PM board is barely used,
Downgrading rating to Neutral from Buy PM’s underlying results continue to perform in-line with expectations (+10%+) despite lackluster combustible volumes and spending behind the launch of iQOS in nearly 20 city markets. However, we have some concerns with PM and see some potential benefits (tax reform, US economy) for its US peers that will likely impact PM to a lesser degree and as a result, we have shifted our preference from PM to MO (Altria Group) this year. We see: 1) The strong US$ continues to weigh on reported results given it sells 100% of its products outside of the US yet PM’s reporting currency in US$. 2) A US tax policy overhaul may have less impact on PM given its 27.8% tax rate vs. peer MO (35.5% tax rate) and RAI (37.1%). 3) Its combustible tobacco volumes have underperformed the overall international cigarette category (world less China/US) and peers as some of its largest markets (Indonesia, Philippines, Russia, Turkey, Japan, Argentina) suffer from either political/economic turmoil or higher cigarette taxation. (Est a 3.8% vol decline in 2016. 4) Heat-not-burn (HNB) competition is ramping up with recent HNB product launches from British American Tobacco and Japan Tobacco. 5) Debt convent constraints prohibit a buyback at present. 6) A general rotation out of defensive/bond proxy names. 7) Will PM/MO remerge? While we see many potential benefits for PM to want to re-merge with MO, we see limited reasons (at least currently) for MO’s mgmt to want to re-merge with PM given MO’s track record of unlocking shareholder value post the spin of PM in Mar 2008. See Tobacco Year Ahead for an in depth discussion. Trimming EPS estimates for FX; Lowering PO to $96 We have updated our model for FX and as a result, we are trimming our 2016-2018 EPS estimates given the strengthening US$ since the US election. For 2016 our estimate falls by a penny to $4.47, at the mid-point of mgmt’s guidance of $4.43-$4.51. For 2017/2018, our EPS estimates are trimmed by 16c/25c to $4.70/$5.35, largely due to a stronger US$ vs. our last update. We now look for -29c FX headwinds in 2017, vs.-14c in Nov. 16. Our PO for PM is $96 and is based on a target multiple of 20.5x our 2017E EPS of $4.70. Our target multiple is in line with its current p/e, a level we believe takes into account near-term international market challenges, recent market shifts away from high dividend paying stocks, along with strong underlying (FX neutral) growth, upside potential from iQOS and its LT growth prospects.
I was recently traveling through Narita and saw the iOQS on display at duty free. I nearly got one for my son to get an opinion on it's appeal, but did not have any more room in the carry on (Christmas gifts for grandkids). I think that is a major upside for PM but my ability to prognosticate is liable to fail in the future.