Will Smoke-Free Products Fuel Philip Morris' (PM) Q3 Earnings?
Philip Morris International Inc. PM is ready to report third-quarter 2023 earnings on Oct 19. It is worth taking a closer look at the company’s smoke-free product business, which constituted 35.4% of its net revenues in the second quarter of 2023. We believe the smoke-free product segment is likely to have played a key role in determining Philip Morris’ performance in the quarter under review.
Smoke-Free Products’ Prospects Look Promising
Growing inclination toward health and wellness has pushed consumers toward low-risk, reduced-risk products (RRPs). Philip Morris has been progressing well with its business transformation. PM is well-placed to become a majority smoke-free company by 2025. To this end, the company’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry. These high-quality next-generation devices have been aiding adult smokers in switching from traditional cigarettes to smoke-free options.
In the second quarter of 2023, revenues from smoke-free products (excluding Wellness and Healthcare) jumped 35.3% to $3,101 million (up 18.3% organically). In the quarter, Philip Morris witnessed continued strength in IQOS performance and pricing power. Total IQOS users at the end of the second quarter were estimated at roughly 27.2 million (including nearly 19.4 million who switched to IQOS and stopped smoking).
Philip Morris International Inc. Price, Consensus and EPS Surprise
Philip Morris International Inc. price-consensus-eps-surprise-chart | Philip Morris International Inc. Quote
For the third quarter, management expects heated tobacco unit (HTU) shipment volumes of 31-33 billion units. We expect a 26.1% jump in smoke-free product revenues (excluding Wellness and Healthcare) in the third quarter. Further, our model suggests total HTU shipment volume growth of 17.9% to 32.4 billion units in the third quarter.
Speaking of the Wellness and Healthcare unit, Philip Morris’ buyouts of Vectura Group plc, Fertin Pharma A/S and OtiTopic were consolidated to form a Wellness and Healthcare category on Mar 31, 2022. Management expects net revenues of about $300 million for the Wellness and Healthcare segment for 2023.
Among other initiatives, Philip Morris became the majority owner of Swedish Match on Nov 11, 2022. Management expects a robust performance from Swedish Match’s existing operations in 2023 due to expectations of strong ZYN volumes in the United States. This also bodes well for the quarter under review.
Further, on Jan 30, 2023, Philip Morris unveiled a long-term partnership with KT&G to continue commercializing the innovative smoke-free devices and consumables of the latter on a unique, worldwide basis (excluding South Korea). This may have contributed to results in the to-be-reported quarter.
Other Trends
PM has been battling cost-related headwinds for a while now. On its last earnings call, management highlighted its intentions to make additional growth-oriented investments, including the commercialization of ILUMA. These may have impacted margins in the quarter under review. Further, soft cigarette shipment volumes have been a concern.
However, Philip Morris has been benefiting from its strong pricing power. Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes.
How Are Estimates Shaping Up?
The Zacks Consensus Estimate for third-quarter revenues is pegged at $9.2 billion, suggesting a rise of 14.3% from the prior-year quarter’s reported figure. The consensus mark for quarterly earnings has risen by 1.3% in the past seven days to $1.61 per share, implying growth of 5.2% from the year-ago quarter’s reported figure. PM has a trailing four-quarter earnings surprise of 7.6%, on average.
Philip Morris carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -0.31%. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat, which is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stocks With the Favorable Combination
Here are three companies worth considering as our model shows that these have the correct combination to beat on earnings this time:
The Boston Beer Company SAM currently has an Earnings ESP of +8.81% and has a Zacks Rank #3. The company is likely to register bottom-line growth when it reports third-quarter 2023 numbers. The Zacks Consensus Estimate for The Boston Beer Company’s quarterly earnings per share of $4.25 suggests an increase of 11.3% from the year-ago quarter’s levels. You can see the complete list of today’s Zacks #1 Rank stocks here.
SAM has a trailing four-quarter negative earnings surprise of 74.9%, on average. The Zacks Consensus Estimate for The Boston Beer Company’s quarterly revenues is pegged at $592.8 million, indicating a drop of 0.6% from the figure reported in the prior-year quarter.
Colgate-Palmolive Company CL currently has an Earnings ESP of +0.37% and a Zacks Rank of 3. The company is likely to register increases in the top and bottom lines when it reports third-quarter 2023 results. The Zacks Consensus Estimate for Colgate-Palmolive’s quarterly revenues is pegged at $4.8 billion, suggesting growth of 8% from the figure reported in the prior-year quarter.
The Zacks Consensus Estimate for quarterly earnings has remained unchanged in the past 30 days at 80 cents per share, which indicates 8.1% growth from the year-ago quarter's reported number. CL delivered an earnings surprise of 1.7%, on average, in the trailing four quarters.
Hershey HSY currently has an Earnings ESP of +1.29% and a Zacks Rank #3. The company is likely to register a top-and-bottom-line increase when it reports third-quarter 2023 numbers. The Zacks Consensus Estimate for the quarterly earnings per share of $2.47 suggests a 13.8% rise from the figure reported in the year-ago quarter.
The Zacks Consensus Estimate for Hershey’s quarterly revenues is pegged at about $3 billion, calling for growth of nearly 9% from the figure reported in the prior-year quarter. HSY has a trailing four-quarter earnings surprise of 8.9%, on average.
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Hershey Company (The) (HSY) : Free Stock Analysis Report
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