Can RRPs & Solid Pricing Fuel Philip Morris (PM) Q4 Earnings?

Philip Morris International Inc. PM is slated to release fourth-quarter 2017 results on Feb 8. The question lingering in investors’ minds is whether this major tobacco player will be able to deliver a positive earnings surprise in the quarter to be reported. Unfortunately, Phillip Morris has lagged earnings estimates in each of the past four quarters, with an average miss of 5.4%.

Philip Morris International Inc Price and EPS Surprise
 

Philip Morris International Inc Price and EPS Surprise | Philip Morris International Inc Quote

However, the company is undertaking solid efforts to expand in the reduced risk products space, given the stringent regulations on tobacco products and consumers becoming more health conscious. Thus, let’s see if the company can reverse the dismal trend this time.

Factors at Play

Philip Morris has been bearing the brunt of lower cigarette volumes, which can be largely accountable to regulatory hurdles in the form of limitations on marketing, anti-smoking campaigns and higher excise duties. Apart from this, rising health consciousness among consumers also resulted in lower cigarette consumption globally. Together, these factors have been weighing on cigarette industry volumes. Incidentally, Philip Morris’ net revenues during third-quarter 2017 were hurt by 3.6% in combustible products. Total shipment volumes in this category also fell 4.1%. As a result, total cigarette and heated tobacco unit shipment volume dipped 0.5%.

To make matters worse, the court recently issued an order which guides cigarette companies to put up self-critical advertisements circulated through television, newspapers, social media and store displays. Such headwinds plaguing the tobacco industry remain a concern for Philip Morris’ combustible products category performance. Well, the Zacks Consensus Estimate for fourth-quarter cigarette volumes is currently pegged at $207 million.

Reduced Risk Products & Pricing – Major Growth Drivers

Given the aforementioned industry conditions, Philip Morris diverted its attention to reduced risk products (RRPs) to propel growth. Evidently, Philip Morris launched the iQOS (in 2014), a smokeless cigarette, in approximately 31 markets globally and catered to more than 3.7 million consumers globally, excluding the United States. The company expects to gain from increased volumes in reduced risk tobacco products, such as e-cigarettes, HeatSticks and iQOS products. Philip Morris has also been making several investments to expand the capacity of its heated tobacco products.

Thanks to the growing popularity of such products, Philip Morris generated revenues worth $947 million from RRPs in third-quarter 2017, up from $212 million in the year-ago period. Also, revenues from RRPS, along with strong pricing more than offset soft cigarette volumes, helping Phillip Morris deliver year-over-year top and bottom-line growth in the third quarter. While, revenues declined in Eastern Europe, the Middle East & Africa (EEMA), the same increased across Asia, and Latin America & Canada — largely fueled by greater revenues from RRPs. The consensus mark for net sales in Asia and Latin America & Canada is $6,648 million and $2,662 million, up from $5,517 million and $2,571 million, respectively.

In fact, the company’s overall sales have been rising annually for more than a year now on the back of such efforts. Also, Phillip Morris enjoys a strong pricing power, which helps it maintain margins at the desired level. Though industry headwinds and unfavorable currency fluctuations remain the major killjoys for Phillip Morris, we expect the aforementioned growth initiatives to continue driving the company in the quarter to be reported.

Q4 Estimates as a Whole

The current Zacks Consensus Estimate for the quarter under review is pegged at $1.36, which represents nearly 24% growth from the year-ago period. This estimate has remained stable over the last 30 days. Moreover, analysts polled by Zacks expect revenues of $8,372 million, up 20.1% from the year-ago quarter.

What the Zacks Model Unveils

To top it, our proven model shows that Philip Morrisis likely to beat bottom-line estimates this quarter. For this to happen, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Well, Philip Morris possesses the right combination, as the Zacks Rank #3 company has an Earnings ESP of +1.35%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Other Stocks With Favorable Combination

Here are some other companies that possess the right combination of elements to post an earnings beat:

Campbell Soup Company CPB has an Earnings ESP of +1.44% and carries a Zacks Rank #2.

The J. M. Smucker Company SJM has an Earnings ESP of +0.75% and a Zacks Rank #3.

Coty COTY has an Earnings ESP of +1.99% and carries a Zacks Rank of 3.

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