Philip Morris' Weakness In Japan, South Korea Sparks Cowen Downgrade

Philip Morris International Inc. PM reported second-quarter results Thursday that prompted Cowen drop its bullish stance on the cigarette maker. 

The Analyst

Cowen's Vivien Azer downgraded Philip Morris from Outperform to Market Perform with a price target lowered from $99 to $85.

The Thesis

Philip Morris' earnings report was accompanied with a downward revision to its earnings guidance, which is clearly disappointing to investors, Azer said in the downgrade note. (See the analyst's track record here.) 

The company does deserve some credit for the transparency in its revision, the analyst said. Cowen adjusted multiple assumptions related to the IQOS smokeless tobacco device: 

• Total 2018 IQOS  shipment volumes were lowered from 45.5 billion to 39.5 billion.
• Sequential share losses in Japan in the third and fourth quarter are projected at 40 basis points versus 30-basis point losses in the second quarter.
• Flat performance in South Korea in the third and fourth quarter versus a 70-basis point gain in the second quarter.

Even if Philip Morris sees upside in IQOS shipments in other markets across Europe and Russia, it's unlikely they would be large enough to offset poorer performance in key markets like Japan and South Korea, which combine for 70 percent of total volumes, Azer said. 

Philip Morris's upcoming analyst meeting in late September could prove to be a catalyst, but without a large reversal in Japan and South Korea, any upside in the near-term is "more muted," according to Cowen. 

Price Action

Philip Morris shares were trading up 3.57 percent to $83.79 at the time of publication Friday afternoon. 

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