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Philip Morris (PM) Troubled by High Costs, Supply-Chain Woes

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·4 min read
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Philip Morris International Inc. PM appears to be troubled by certain cost escalations and supply-chain hurdles. The war between Russia and Ukraine further worsened the situation. Apart from this, soft cigarette volumes and volatile currency movements are also concerns. Let’s delve deeper.

Things Not Rosy for Philip Morris

In the first quarter of 2022, the adjusted operating income margin fell 30 basis points (bps) on an organic basis. The decline can be attributed to comparisons with the solid margin performance in the year-ago period, the increased initial cost of IQOS ILUMA devices, inflation across some key supply-chain elements like wage, energy and direct materials and higher air freight (which, in turn, was aggravated by the Ukraine war).

On its first-quarter 2022 earnings call, management stated that its Ukraine manufacturing facility in Kharkiv remained suspended. Further, on Mar 24, Philip Morris stated that its team was exploring options to exit the Russian market in a planned way. The company has been facing several supply-chain and regulatory hurdles in its Russian business and took strong steps to scale down its operations in the region, including the cancellation of all new investments and product launches, such as IQOS ILUMA and IQOS VEEV. It is also delisting 25% of its cigarette products, including Marlboro and Parliament SKUs. The war has further disrupted the global supply chain and increased inflationary pressure on certain materials and services. PM’s guidance for 2022 does not include contributions from Ukraine and Russia from Apr 1, 2022.

In 2022, this Zacks Rank #4 (Sell) company’s gross margin is expected to be moderately low due to the increased initial cost of IQOS ILUMA, elevated logistic costs, growth-oriented investments in the smoke-free space and inflation related to supply-chain elements. Also, in the second quarter of 2022, the proforma operating margin is likely to decline further on an organic basis.

Philip Morris International Inc. Price, Consensus and EPS Surprise

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

Philip Morris International Inc. price-consensus-eps-surprise-chart | Philip Morris International Inc. Quote

Other Concerns

Cigarette volumes, in general, have been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives. In 2022, the total international industry volume growth (on a proforma basis, excluding the results attributable to Russia and Ukraine) is estimated in a range of negative 1% to flat, excluding China and the United States. The total cigarette and heated tobacco unit shipment volume growth (proforma) is likely to come in the range of about flat to an increase of 1%.

On its first-quarter 2022 earnings call, management highlighted that it expects continued uncertainty concerning the recovery pace from the pandemic-led operating landscape, especially in the South & Southeast Asia region, in 2022. Management expects continued gradual recovery in the duty-free business outside Asia and no meaningful recovery in Asia.

Moving on, Philip Morris’ significant international presence exposes it to the risk of adverse currency fluctuations. Thus, volatility in exchange rates always remains a concern. For the second quarter of 2022, the company’s proforma adjusted earnings per share (EPS) are expected in the band of $1.19-$1.24, including the currency headwinds of 15 cents per share.

While strong pricing and a focus on reduced risk products are upsides for Philip Morris, the abovementioned challenges cannot be ignored for the near term.

3 Solid Staple Stocks

Some better-ranked stocks are Sysco Corporation SYY, Pilgrim’s Pride PPC and Campbell Soup CPB.

Sysco, which engages in marketing and distributing various food and related products, sports a Zacks Rank #1 (Strong Buy). Sysco has a trailing four-quarter earnings surprise of 9.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for SYY’s current financial-year sales and EPS suggests growth of 32.6% and 124.3%, respectively, from the year-ago reported number.

Pilgrim’s Pride, which produces, processes, markets and distributes fresh, frozen and value-added chicken and pork products, carries a Zacks Rank #2 (Buy). Pilgrim’s Pride has a trailing four-quarter earnings surprise of 31.4%, on average.

The Zacks Consensus Estimate for PPC’s current financial-year EPS suggests growth of almost 43% from the year-ago reported number.

Campbell Soup, which manufactures and markets food and beverage products, currently carries a Zacks Rank #2. Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.5% from the year-ago reported figure.


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