Shares of Philip Morris International Inc . (NYSE: PM ) have certainly been taken out to the woodshed lately. PM stock has dropped a staggering 20% over the past five trading days following a disappointing earnings report. Undoubtedly a selloff was warranted due to the tepid earnings, but the recent carnage has now gotten a little extreme, both from a technical and fundamental perspective. I look for PM to find its footing near current levels.
Philip Morris reported earnings on April 19 that were a mixed bag. Earnings were a beat at $1 per share compared to consensus estimates of just 90 cents. Revenues missed, however, coming in at $6.90 billion versus consensus of $7.04 billion. Most importantly, 2018 guidance was lowered slightly to a range of $5.25 to $5.40.
Assuming the lower end of the guidance and using the closing price of $82.49 gives a forward P/E of 15.7 for PM stock, well below the five-year average of 20.24 and nearing the lows of 14.33. PM stock is getting to be a value play, especially on further weakness.
Phillip Morris Stock Chart
Click to Enlarge
A look at the weekly chart going back to 2012 shows that PM is fast approaching major long term support at the $75 level. MACD is also at the most extreme reading over the past six years, with prior instances signaling significant short term lows.
Yesterday's price action was also encouraging, with PM stock trading down to $80.64 before reversing to close well off the lows at $82.70. This type of reversal pattern is usually a sign the sellers may have become exhausted, especially after such a brutal five day drop. A bounce of some sort would not be unlikely.
PM options are trading in the 63rd percentile of implied volatility (IV) which means option prices are comparatively expensive. This favors option selling strategies when constructing trades. So to position for long term support to hold in PM stock, a put credit spread makes sense.
Phillip Morris Trade Idea
Buy PM Sep $70 puts and sell PM Sep $75 puts for a 95-cent net credit.
Maximum gain on the trade is $95 per spread with maximum risk of $405 per spread. Return on risk is 23.5%. The short $75 strike price is right at long term support and provides a 9% downside cushion to the $82.49 closing price of PM stock. The $75 strike price also implies a 14.29 forward P/E, a multiyear low in valuation.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.