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Will RRPs & Pricing Drive Philip Morris' (PM) Q1 Earnings?

Zacks Equity Research

Philip Morris International Inc. PM is slated to release first-quarter 2019 results on Apr 18. The company’s earnings have surpassed the Zacks Consensus Estimate in the trailing four quarters, the average being 12.1%. Let’s take a look at the factors that are likely to impact this tobacco giant in the upcoming quarterly announcement.

Pricing & RRP’s – Key Upsides

Tobacco companies are placing their bets on reduced risk products (RRPs) such as e-cigarettes. These products are rapidly gaining traction owing to consumers’ rising health consciousness and awareness regarding the harmful impacts of nicotine. With radical investments for undertaking research and development in this space, Phillip Morris is pioneering the shift from harmful tobacco products to low-risk alternatives.

In fact, the company’s IQOS, a smokeless cigarette, is among the leading RRPs in the industry. In October 2018, the company launched additional versions of IQOS in Japan. 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 to switch from traditional cigarettes to smoke-free options. IQOS users at the end of fourth-quarter 2018 totaled 9.6 million. To cater to the rising demand for such products, Phillip Morris is undertaking plant conversions and transforming the units from cigarette to RRPs manufacturing facilities. Additionally, it has inked a deal with Canada-based Parallax that provides low-risk alternatives of tobacco.

We expect Philip Morris’s performance in the first quarter to gain from consistent growth in RRPs space. Other tobacco companies like Altria MO, British American Tobacco BTI and Vector Group VGR are striving to expand in e-cigarettes and other low-risk tobacco options.

Additionally, strong pricing is an upside to Philip Morris’s performance. In fact, high pricing has enabled the company to generate substantial revenues in the combustible category. Moreover, the price hikes enable the company to maintain margins at the desired level. As smokers tend to absorb price increases owing to their addiction, this strategy is likely to support the company’s performance 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

 

Receding Cigarette Volumes are a Concern

Phillip Morris’ cigarette category depicts gloominess, thanks to anti-tobacco campaigns as well as regulatory hurdles. These aspects are affecting cigarette sales volumes. Consequently, shipment volumes in the segment have been deteriorating for a while. With increasing vigilance on tobacco products, it is hard for Philip Morris to escape the impacts of deteriorating cigarette sales. Although RRPs are gaining traction, they are yet to offset the decline in cigarette volumes. In fact, management had earlier projected that total cigarette and heated tobacco shipment volumes will decline in the range of 1.5-2% in 2019. This mars expectations for the impending quarter as well.

Moreover, adverse impacts from currency rates as well as pre-tax charges associated with the Montreal legal proceedings are likely to weigh upon the company’s first-quarter performance.

All said, let’s take a look at the estimates for the upcoming quarter as well as the Zacks Model.

Estimates for the Quarter

The Zacks Consensus Estimate for first-quarter 2019 earnings has been stable in the past 30 thirty days and is currently pegged at $1.01 per share. Moreover, the estimate reflects an increase of 1% from $1.00 delivered in the year-ago quarter.

Further, the Zacks Consensus Estimate for revenues is currently pegged at $6,738 million, depicting a decline of almost 2.3% from the year-ago quarter’s tally.

Zacks Model

Our proven model shows that Phillip Morris is likely to beat earnings estimates this quarter. A stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Phillip Morris’s Zacks Rank #3 combined with the Earnings ESP of +0.29% makes us reasonably confident about an earnings beat. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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British American Tobacco p.l.c. (BTI) : Free Stock Analysis Report
 
Altria Group, Inc. (MO) : Free Stock Analysis Report
 
Vector Group Ltd. (VGR) : Free Stock Analysis Report
 
Philip Morris International Inc. (PM) : Free Stock Analysis Report
 
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