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Philip Morris (PM) Q2 Earnings: Will RRPs Steal the Show?

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Philip Morris (PM) Q2 Earnings: Will RRPs Steal the Show?

Philip Morris' (PM) second-quarter 2018 results are likely to gain from rising RRPs demand. However, cigarette volumes will remain soft.

Philip Morris International Inc. PM is slated to release second-quarter 2018 results on Jul 19, before the opening bell. The company’s earnings have lagged estimates in three of the past four quarters, with an average miss of 1.5%.

Well, this renowned tobacco company has been sailing on troubled waters, thanks to declining cigarette shipment volumes, triggered by government regulations to curb tobacco consumption and anti-tobacco campaigns. Nevertheless, the company has been managing to stay afloat by expanding its presence in the reduced risk products (RRPs) category. Bearing these in mind, let’s discuss the factors that are likely to impact this tobacco giant’s upcoming quarterly announcement.

Estimates for the Quarter

The Zacks Consensus Estimate for second-quarter 2018 earnings is currently pegged at $1.22 per share, which reflects an improvement of almost 7% from the year-ago quarter’s level. However, the estimate went down by two cents over the past 30 days

Further, analysts polled by Zacks expect revenues of $7,528 million, depicting growth of 8.8% from a year ago.

High Hopes With RRPs

With radical investments for undertaking research and development in the RRPs category, Phillip Morris is pioneering the shift from harmful tobacco products to scientific and low-risk alternatives. Notably, the company has invested more than $4.5 million since 2008 to develop, substantiate and build manufacturing capacity for a wide range of smoke-free products. In fact, the company’s iQOS, a smokeless cigarette, is amongst one of the leading RRPs in the industry. Buoyed by such efforts, revenues from RRPs doubled (on a constant-currency basis) to $1,127 million during first-quarter 2018, largely driven by increased sales of IQOS devices. Notably, RRP revenues during the first quarter represented 16.3% of the company’s overall net revenues

Progressing along these lines, the company recently inked a deal with Parallax, a Canadian company specializing in pulmonary research and medicine. The companies will work toward the reduction of harmful tobacco products by developing an effective nicotine-delivery system including e-cigarettes, pipe tobacco, cigars and hookah that leverages the most advanced technologies in pulmonary medicine. Additionally, the marketing and technology sharing agreement between Philip Morris and its peer Altria Group MO, which is currently under FDA review, is also expected to boost the business of the parties. Apart from such strategic partnerships, Phillip Morris has also been undertaking plant conversions, transforming them from cigarette to RRPs manufacturing facilities.

With such robust plans rolled up its sleeves, Philip Morris is well on track to double its worldwide in-market heated tobacco unit sales and is optimistic about strength in IQOS devices. Well, such factors are likely to aid the company’s performance in the upcoming quarterly release.

Pricing Likely to be a Boon

Philip Morris has been managing to generate substantial revenues in the combustible category with higher pricing, as witnessed in the last reported quarter. Moreover, the price hikes will help the company maintain margins at the desired level. It continues to expect pricing as the key growth driver in the near term.

Philip Morris International Inc. Price, Consensus and EPS Surprise

 

Philip Morris International Inc. Price, Consensus and EPS Surprise | Philip Morris International Inc. Quote

Cigarette Segment Likely to be Dismal

Government authorities have been brandishing the whip on tobacco players as smoking has become one of the primary causes of heart diseases and cancer. Apart from seeking authorization for any new tobacco product, the FDA has made it mandatory for tobacco companies to use precautionary labels on packets and putting self-critical advertisements, emphasizing on the addictive nature of cigarettes. To add to the woes, the FDA is bent on drastically reducing nicotine in cigarettes to minimally addictive levels. If enacted, low nicotine levels will prove to be disastrous for cigarette manufacturing companies. Moreover, increasing regulatory moves have raised awareness among consumers regarding the detrimental effects of tobacco consumption, motivating them to quit smoking.

The impacts of such initiatives are clearly visible on Philip Morris’s receding cigarette shipment volumes. During first-quarter 2018, total cigarette shipment volume fell 5.3%, preceded by declines of 2.1%, 4,1%, 7.5% and 11.5% during the fourth, third, second and the first quarters of 2017, respectively.

Apart from Philip Morris, performances of other industry majors such as Altria Group, British American Tobacco BTI and Vector Group VGR have also been affected by such factors.

Sadly, the decline in cigarettes is expected to continue in the forthcoming quarters as well. Additionally, soft volumes in Gulf Cooperation Council, a difficult pricing environment in Russia and sluggish sales in Japan pose hurdles for the company in the to-be-reported quarter. That said, analysts polled by Zacks anticipate Philip Morris’s total cigarette shipment volumes to dip 5.2% in second-quarter 2018.

All said, lets now take a look at the Zacks Model for the upcoming quarterly announcement.

A Look at the Zacks Model

Our proven model shows that Philip Morris is likely to beat earnings estimates this quarter. A stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Philip Morris currently has an Earnings ESP of +0.20%. This combined with the company’s Zacks Rank #3 make us reasonably confident of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

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