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Are Cigarettes Finally Dead? Phillip Morris Plunges

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David Borun
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Philip Morris International (PM) shares are in free-fall this morning after announcing Q1 earnings that were actually slightly higher than analyst estimates.  Revenues were lower than expected however, and the future of the industry looks grim. 

The stock is currently trading down over 17% on the day at $84.49 after closing yesterday at $101.20.

The international producer of Marlboro cigarettes and other tobacco-based products - which was spun-off from U.S. producer Altria almost exactly ten years ago - reported earnings of $1.00/share in Q1 versus a Zacks Consensus Estimate of $0.88.  Revenues came in lower than estimates with the company posting $6.89B in sales, while analysts were expecting $7.02B.  Most of the increase in earnings was due to currency fluctuations and favorable tax rates rather than improved operations.  

Sales in regions Eastern-Europe, Africa and the Middle East, East-Asia and Australia, and Latin America and Canada all saw a decrease in sales by unit volume.  Only Southeast Asia saw mild sales growth.
Guidance for 2018 remained basically the same, though the range was adjusted slightly from $5.25 - $5.35/share to $5.25 - $5.40/share.

Industry-wide carnage

Other industry players are falling today as well on the news as investors ruminate on an uncertain future for tobacco. U.S. Marlboro producer Altria (MO) is down over 7% and British American Tobacco (BTI) – owner of R.J Reynolds – is down almost 6%.

Philip Morris has missed the Zacks Composite Earnings estimate in each of the last 4 quarters due to regulation, increased taxation and an overall decline in demand for tobacco products.

The 2008 spinoff of Philip Morris from Altria was intended to take advantage of international demand for tobacco products outside the purview of onerous U.S. regulation and it worked…for a while.  Now however, facing the same pressures worldwide as they once did in the U.S., Philip Morris is scrambling to replace traditional cigarette sales with alternative tobacco products.

Reduced Risk”, Really?

In the face of declining market, tobacco companies have embraced “Reduced Risk Products” (RRPs) to attract customers.  They are betting on heated tobacco products like vaporizers and smokeless tobacco as less-unhealthy choices for those who choose to continue to use tobacco.

Unfortunately for Philip Morris, sales of its iQOS vaporizer device were disappointing in Asia (the device’s primary market), as were sales of the “Heatstick” cartridges used in the iQOS.

Heated tobacco devices were seen as a potential savior for Phllip Morris and the industry as a whole, but demand seems to have leveled of globally faster than expected.

Investing in an industry whose potential savior is a group of products that still have the word “risk” in their name seems potentially unwise.

Income Play

The real “savior” of Phllip Morris and the whole industry – at least from investors’ point of view - has been a healthy dividend.  Philip Morris and Altria both pay a dividend of just over 4% and British American pays 3.7%.

With interest rates on the rise, however, dividend paying stocks look relatively less attractive, and with the future of tobacco so significantly uncertain, the ability of these companies to continue paying juicy dividends long-term is in doubt.

Philip Morris does have over $8B on the balance sheet, so the dividend looks safe for the time being.

With so many true growth stocks available to investors in truly innovative industries that are making our daily existence better, it’s difficult to justify investing in a dying sector like tobacco.

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Philip Morris International Inc. (PM) : Free Stock Analysis Report
Altria Group, Inc. (MO) : Free Stock Analysis Report
British American Tobacco p.l.c. (BTI) : Free Stock Analysis Report
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