Philip Morris' (PM) Focus on Smoke-Free Products to Aid in 2024
Philip Morris International Inc. PM has been treading well on its growth trajectory with its strategic pricing and focus on smoke-free alternatives in the face of soft cigarette volumes. Given consumers’ growing inclination toward reduced-risk products, this tobacco biggie is on track to become a majority smoke-free company by 2025.
These upsides are likely to continue aiding this Zacks Rank #3 (Hold) company in solidifying its market position moving forward as well.
Adding Leaves to the Growth Story
Philip Morris' resilience is evident in its ability to leverage robust pricing power, which has been providing some cushion against soft cigarette shipment volumes. The addictive nature of cigarettes allows the company to pass on higher prices to consumers, supporting revenues. Pricing is likely to remain a driver in the forthcoming periods as well.
Recognizing the shift in consumer preferences toward reduced-risk products, PM has been progressing well with its business transformation, with smoke-free products generating 36.2% of the company’s net revenues in the third quarter of 2023. Toward this end, PM’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry. These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to aid adult smokers in switching from traditional cigarettes to smoke-free options.
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Among other initiatives, Philip Morris became the majority owner of Swedish Match on Nov 11, 2022. The company witnessed impressive results from the Swedish Match business in the third quarter, driven by ZYN in the United States. Revenues from smoke-free products (excluding Wellness and Healthcare) jumped 35.7% to $3,234 million (up 16.2% organically) in the third quarter of 2023. Total IQOS users at the end of the third quarter were estimated at roughly 27.4 million (including nearly 19.7 million who switched to IQOS and stopped smoking).
Countering Hurdles
Philip Morris has been witnessing low cigarette volumes. Cigarette volumes, in general, have been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives. Additionally, the impact of macroeconomic headwinds like inflation on Adult Tobacco Consumers’ (“ATC”) disposable income has been affecting cigarette industry volumes. In the third quarter of 2023, Philip Morris’ cigarette shipment volumes dropped 0.5% to 161.1 billion units.
On its third-quarter earnings call, Philip Morris stated that it expects to make additional growth-oriented investments in 2023, including the commercialization of ILUMA. Though beneficial in the long run, these investments are likely to weigh on margins in the near term.
Wrapping Up
Philip Morris’ strategic pricing and focus on smoke-free alternatives position it for growth amid industry challenges. Management is confident about its CAGR targets for 2024-2026, which include organic top-line growth of 6-8%, organic operating income growth of 8-10 and currency-neutral adjusted EPS growth of 9-11%.
Shares of the company have increased 6.1% in the past three months compared with the industry’s growth of 2.2%.
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