Will Staples ETFs Gain on Philip Morris' Q2 Earnings Beat?

Philip Morris International Inc. PM reported second-quarter 2020 results on Jul 21, before market open. Earnings and revenues topped estimates but declined year over year. However, since the earnings release, Philip Morris’ shares have gained about 4.2% largely on better-than-expected results.

Q2 Performance in Detail

Philip Morris reported adjusted earnings per share (EPS) of $1.29, beating the Zacks Consensus Estimate of $1.09. However, the bottom line declined 11.6% year over year. After excluding currency, the metric dropped 7.5%.

Net revenues of $6.65 billion surpassed the Zacks Consensus Estimate of $6.49 billion. However, the top line declined 13.6% year over year. Furthermore, the metric fell 9.5% at constant currency (cc). During the reported quarter, the company saw an adverse volume/mix mainly coming from soft cigarette volumes, somewhat made up by greater heated tobacco volumes. Philip Morris, however, witnessed favorable pricing variance in the quarter.

Adjusted operating income decreased 12.7% year over year to $2.80 billion.

Shipment Volume

The company’s total cigarette and heated tobacco unit shipment volume fell 14.5% to 170.1 billion units. While cigarette shipment volume declined 17.6% to around 151.4 billion units in the second quarter, heated tobacco unit shipment volume of almost 18.7 billion units reflected a year-over-year rise of 24.3%.

There was a decline in shipment volumes in the Eastern Europe, Middle East & Africa, South & Southeast Asia, East Asia & Australia and Latin America & Canada regions.

Coronavirus Outbreak: Not a Big Threat

Philip Morris is expected to witness lower pandemic-related business disruptions. The company informed that it currently has sufficient access to inputs and is not seeing any major supply-related hurdles. Considering all factors and the current sales trends, Phillip Morris does not anticipate any out-of-stock situation in any core operating income market. The company doesn’t expect any national lockdown recurrence in any of its core international markets in the second half of 2020. However, any near-term recovery is also not expected in the duty-free business due to travel-related uncertainties.

Guidance Update

Philip Morris expects adjusted earnings per share at $4.92-$5.07 in 2020 compared with $5.13 reported in the year-ago period. At cc, adjusted earnings per share are expected to grow 2-5% to $5.23-$5.38. For 2020, Phillip Morris expects net revenues (at cc) to drop low-single digits (on a like-for-like basis). The same is expected to grow low-single digits, excluding Indonesia and the duty-free business. For the third quarter, the company expects earnings per share to be almost in line with the second-quarter figure. This is likely to be backed by sequential revenue improvement, offset by factors like timing of various costs.

ETF Impact

Some consumer staples ETFs with significant exposure to Philip Morris seem to have lost since its earnings release.

Fidelity MSCI Consumer Staples Index ETF FSTA

This fund offers exposure to the U.S. Consumer Staples sector at a very low expense ratio. It has AUM of $656.5 million and charges a fee of 8 basis points a year. From an industry-exposure look, Household Products, Beverages and Food & Staples Retailing have the highest exposure to the fund, with 23.7%, 23.6% and 22% allocation, respectively. It has a 5.6% exposure to Philip Morris.

Since the earnings release, the fund has gained about 1.1%. FSTA has a Zacks ETF Rank #5 (Strong Sell), with a Medium-risk outlook (read: Walmart Delights Investors: ETFs in Focus).

iShares U.S. Consumer Goods ETF IYK

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the consumer goods space. It has AUM of $553.1 million and charges a fee of 42 basis points a year. From a sector-look, Food Beverage Tobacco, Household & Personal Products and Autos & Components have the highest exposure to the fund, with 40.7%, 22% and 15.1% allocation, respectively. It has an exposure of 4.9% to Philip Morris.

Since the earnings release, the fund has gained about 0.4%. However, the fund has a Zacks ETF Rank #4 (Sell), with a Medium-risk outlook (see all Consumer Staples ETFs here).

Vanguard Consumer Staples ETF VDC

This fund is one of the most popular in the U.S. Consumer Staples sector. It has AUM of $5.34 billion and charges a fee of 10 basis points a year. From a sector-look, Household products, Soft drinks and Packaged Foods & Meats have the highest exposure to the fund, with 24.7%, 20.4% and 17.2% allocation, respectively. It has a 4.5% exposure to Philip Morris.

Since the earnings release, the fund has gained about 1%. VDC has a Zacks ETF Rank #5, with a Medium-risk outlook (read: Try These ETF Strategies as the Coronavirus Crisis Worsens).

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Philip Morris International Inc. (PM) : Free Stock Analysis Report
 
Fidelity MSCI Consumer Staples Index ETF (FSTA): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
iShares U.S. Consumer Goods ETF (IYK): ETF Research Reports
 
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