Global cigarette and tobacco giant Philip Morris International Inc. (PM) gained 25% in first three and a half months of 2017, as investors anticipated another strong earnings beat. On Thursday morning, when the New York City-based Marlboro maker instead posted top line and bottom line numbers that failed to meet consensus, the multinational company saw its shares nosedive almost 4%. (See also: Why Philip Morris is Up 24% in 2017.)

Analyst: Don't Panic

Philip Morris’ cigarette shipment volume sunk over 11% in the most recent quarter across all major regions, dragging revenue down a fraction of a percentage point to $6.06 billion, compared to the Street’s consensus for a 6% gain.

As investors sell off PM shares, analysts at Wells Fargo remain unconcerned, reiterating an outperform rating on shares of the tobacco leader, highlighting the company’s portfolio strength and FY17guidance, which exceeded expectations.

“While Q1 was a tougher than expected quarter, we believe PM will execute to protect margins from secular combustible cig volume weakness with strong pricing and cost management. Importantly, we expect management’s commentary to focus on continued momentum behind iQOS as the company pivots toward reduced-risk products (RRPs). We expect the stock to react negatively on today’s results and would be buyers on weakness,” wrote Wells Fargo analyst Bonnie Herzog and team after results on Thursday. (See also: 'War of Innovation' Rages in Tobacco Industry.)

A Shift to RRPs

Herzog indicates that investors fearful of lower-than-expected combustible cigarette volumes are missing the larger point, in which Philip Morris is intentionally moving away from “low-to-no margin volume in favor of supporting the premium end of its total portfolio.” An integral aspect of this expanded premium mix of PM’s portfolio is its RRPs, regardless of excise tax treatment, suggests the analyst. Banking on the growth of Philip Morris’ new “harm-reduced” burn-not-smoke tobacco sticks called iQOS, Herzog highlights PM’s FY17 EPS growth guidance of 9% to 12%, “which suggests a significantly improved 2H as comps ease and iQOS capacity constraints are unlocked.”

All in all, despite weaker volume in Q1, Herzog says results were “in line.” Wells Fargo lowered FY17/18 EPS estimated by $0.02, maintain a valuation range of $140 at the midpoint on PM stock. Herzog warned investors not to get “caught up” on Q1 volume weakness, as analysts believe “PM is executing a broader strategy (started 2 years ago) to premium-ize its total tobacco portfolio.”