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Philip Morris (PM) Hurt by Low Cigarette Sales, IQOS Expands

Zacks Equity Research

Philip Morris International Inc. PM isn’t among investors’ preferred picks, thanks to weak cigarette sales volume. Over the past three months, the stock has dipped 3.3% compared with the industry’s decline of 5.8%. Nevertheless, the company is striving to keep afloat on the success of IQOS — a renowned e-cigarette brand growing rapidly across the globe — and gains from pricing. Let’s delve deeper.

 



Declining Cigarette Sales

Receding cigarette sales volume has been taking a toll on Philip Morris’ performance. Cigarette sales are being affected by strict government impositions such as the use of precautionary labels and self-critical advertisements as well as consumers’ rising health consciousness. The company’s cigarette shipment volume declined 2.1% in 2018. Although the metric was flat year over year in first-quarter 2019, the same declined almost 3.6% in the second quarter. Further, revenues from combustible products declined 7.1%.

Going ahead, management anticipates total shipment volume, including cigarettes and heated tobacco categories, to decline nearly 1% in 2019. Moreover, industry volume is expected to decline in the lower end of 2.5-3%.

Growth in RRPs & Pricing Are Upsides

Serious health hazards due to cigarette smoking have pushed consumers toward reduced risk products (RRPs). With radical investments for undertaking research and development in the RRPs category, Philip Morris is pioneering the radical shift from harmful tobacco products to scientific and low-risk alternatives. In fact, the company’s IQOS, a smokeless cigarette, counts amongst one of the leading RRPs in the industry.

IQOS users at the end of second-quarter 2019 totaled more than 11 million, marking an important milestone. In fact, strong growth in IQOS boosted revenues in the RRPs unit, which increased almost 43.7% to $1,466 million in the second quarter.

Going ahead, the company expects consistent growth in IQOS and Heated Tobacco category, and therefore remains committed toward expanding these products to newer geographies.

Also, the marketing and technology sharing agreement between Philip Morris and Altria Group MO, pertaining to the sale of IQOS in the United States, has been approved by the FDA. However, the FDA is keeping a tab on the marketing of such vaping products to regulate its usage among teenagers. Moreover, we note that talks of a merger between Philip Morris and Altria were called off recently. Nevertheless, Altria will maintain its agreement with Philip Morris, pertaining to the commercialization of IQOS in the United States.

Moreover, Philip Morris, with a Zacks Rank #3 (Hold), has been gaining from higher cigarette pricing. Evidently, higher pricing at the combustible tobacco portfolio has been aiding the company’s performance for a while. In fact, higher pricing variance was an upside to its performance across several regions in the second quarter of 2019.

Wrapping up, we expect such positives to keep supporting Philip Morris’ performance and aid cushioning headwinds related to cigarettes.

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Hershey HSY presently has a Zacks Rank #2 (Buy) and long-term EPS growth rate of 7.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Estee Lauder Companies EL, with a long-term earnings growth rate of 12.7%, currently carries a Zacks Rank #2.

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