Troubled Tobacco Stock Dips After Downgrade

Credit Suisse sees significant downside risk for Philip Morris

Managing Editor
Dec 18, 2018 at 9:48 AM
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The shares of Philip Morris International Inc. (NYSE:PM) are down 1.8% to trade at $79.95, after Credit Suisse downgraded the tobacco name to "underpeform" from "neutral," while slashing its price target to $74 from $92. The analyst in coverage says the company's reliance on heated tobacco products leaves it exposed to significant downside risk. 

The $74 level represents territory Philip Morris stock hasn't traded near since 2012. In fact, the $75 level has served as a longer-term floor dating back nearly six years. In the short term, PM has shed nearly 23% year-to-date, and even shorter term, is heading toward its third straight weekly loss.

Despite the stock's struggles, the analyst sentiment remains stacked in PM's favor. Of the 14 brokerages in coverage, nine rate the security a "buy" or better, with only one "sell" on the books. Further, its average 12-month price target of $93.25 is a nearly 15% premium to the stock's current perch, and sits in territory the stock hasn't traded at since a massive bear gap back in April. 

In addition, there is ample room for more short sellers to come aboard the struggling tobacco name. The 9.53 million shares sold short is the lowest amount since the July 1 reporting period, represents a meager 0.6% of PM's total available float, and only 2 times the average daily trading volume. 

Those wanting to bet on the tobacco name may want to consider an options buying strategy, as Philip Morris has been a strong target for anyone buying premium. This is per the stock's Schaeffer's Volatility Scorecard (SVS) of 82 out of a possible 100, which indicates that PM has tended to make outsized moves over the past year, relative to what the options market has priced in.

 

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