PM is on the tape with Q1 2013 EPS of $1.29, a shortfall of $0.05 versus consensus – however, currency was a $0.07 headwind in the quarter. Currency is now forecasted to be a $0.19 headwind for the year (versus $0.06 prior) resulting in a $0.13 downward adjustment to EPS at both the top and bottom end (now $5.55 to $5.65). Underlying guidance remains unchanged.
PM posted a volume decline of 6.5% (against the toughest comparison of the year, +5.4%). Volume was weaker than consensus in multiple regions – European Union (-10.1% reported versus -6.7%), Asia (-10.4% reported versus -5.4%) and Latin America and Canada (-7.5% reported versus -1.0%). However, again, Q1 was the most difficult comparison of the year in each of those regions. Despite the volume shortfall versus consensus, reported revenue (net of excise taxes) of $7.584 billion came in slightly better than consensus, against a very difficult comparison. Constant currency organic revenue growth was +3.2% despite the volume print, indicating to us that the pricing architecture for 2013 is in place and intact.
Operating income declined year over year (-0.6%), currency neutral EBIT +2.9%, so the company saw negative operating leverage for the first quarter since Q4 2011 – not surprising given the volume print in the quarter.
What we liked:
- Preservation of underlying operating guidance
- Solid pricing architecture in place for 2013
- Respectable constant currency organic revenue growth of +3.2% against a difficult comparison
- Comparisons ease substantially through the balance of 2013
What we didn’t like:
- EPS miss and reduction of guidance (even if for no reason other than currency)
- Volume weakness across multiple regions versus consensus (and even versus our more bearish estimates)
- Lack of operating leverage (first time since Q4 2011)
- Awful FCF generation in the quarter (-32.8%, and -17.1% adjusting for currency)
It’s tough for us to be positive on a stock when EPS estimates are heading lower (regardless of the reason) and when we couple that with a firm view of continued strength in the U.S. dollar, we have a hard time getting behind PM at this point despite what we readily acknowledge as strength in the underlying business model.
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HEDGEYE RISK MANAGEMENT, LLC