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Philip Morris (PM) Gains on RRPs Popularity & Pricing Power

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Zacks Equity Research
·3 min read
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Receding cigarette sales volumes, stemming from consumers’ rising health consciousness and regulatory headwinds, have led several tobacco companies including Philip Morris International Inc. PM to expand low-risk offerings. These next-generation tobacco products have been gaining immense popularity owing to their less detrimental impacts on health. In fact, Philip Morris is among the industry pioneers in driving the shift from cigarettes to reduced risk products (“RRPs”). Moreover, efficient pricing strategies have been fundamental to the company’s growth. Let’s take a closer look.

RRPs Continue Growing

Philip Morris’ IQOS is one of the leading RRPs in the industry. IQOS was launched in the United States in 2019, through a commercial deal with Altria Group, Inc. MO that was approved by the FDA. In December 2020, IQOS 3 received authorization from the FDA for sale in the United States. The new device incorporates a number of technological improvements like enhanced battery life and quicker recharge.

We note that IQOS devices contributed nearly 7% to the company’s revenues in the RRPs category in 2020. In fact, total users of IQOS as of the end of fourth-quarter 2020 were estimated to be about 17.6 million. Strong growth in IQOS boosted revenues in the RRPs category, which increased 26.3% year on year to $1,937 million in the fourth quarter. Moreover, heated tobacco unit shipment volumes of 21.7 billion units rose 26.9% year over year. The company expects its heated tobacco category to keep gaining from the growing popularity and acceptance of IQOS devices. Therefore, it is committed toward expanding these products to more markets.

We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have also been expanding their offerings in the low-risk tobacco space.

Pricing is a Key Upside

Philip Morris has long been benefiting from strong pricing power. This has been boosting revenues and adjusted operating income despite unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible reduction in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes.

Evidently, higher pricing variance was an upside to the company’s performance across most regions during the fourth quarter. Favorable combustible products pricing aided the company’s adjusted operating income margin, which rose 1.7% (on an organic basis) in the quarter. Continued pricing power is likely to keep supporting the company’s performance in the forthcoming periods.

Shares of this Zacks Rank #3 (Hold) company have gained 7.9% in the past three months compared with the industry’s rise of 11%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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