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Philip Morris (PM) Q1 Earnings: Can RRPs Pare Cigarette Woe?

Zacks

Philip Morris International Inc. PM is slated to release first-quarter 2018 results on Apr 19, before the opening bell. The company’s earnings have lagged estimates in each of the past four quarters, with an average miss of 6.1%. Lately, Philip Morris has been treading on shaky grounds, thanks to the jolts from receding cigarette consumption stemming from strict government regulations and rising consumer awareness regarding the harmful impacts of tobacco. However, the company has been combating such challenges with strength in Reduced Risk Products (RRPs). That said, let’s see what this earnings season has in store for this tobacco giant.

Cigarette Segment to Stay a Worry

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 cigarette packets. Additionally, these companies have been directed to put self-critical advertisements on television and newspapers, particularly 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. The initiative was proposed in 2017 but was delayed due to ongoing research. If enacted, low nicotine levels will prove to be disastrous for cigarette manufacturing companies. Moreover, increasing regulatory moves have raised awareness amongst 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. Shipment volume in this category declined 2.1%, 4,1%, 7.5% and 11.5% during the fourth, third, second and the first quarters of 2017, respectively. The decline is expected to continue in the forthcoming quarters as well. Analysts polled by Zacks anticipate total cigarette shipment volumes to dip 0.16% in first-quarter 2018.

Further, the effect of such headwinds is visible on Philip Morris’s shares that have declined 10.3% in the past six months, compared with the industry’s fall of 7%. Well, apart from Philip Morris, performances of other industry majors such as Altria Group MO, British American Tobacco BTI and Vector Group VGR have been negatively impacted by such factors as well.



Hopes on Reduced Risk Products

Keeping the headwinds aside, Philip Morris has been exploring opportunities through RRPs to stay afloat. The company stands firm on its ambitions to develop a smoke free future, evident from its recent move to completely transform one of its cigarette production facilities in Greece for the manufacture of HEETS — a unit used with iQOS. In fact, with investments close to $4.5 billion since 2008 for undertaking research and development in the RRPs category, the company is pioneering the radical shift from harmful tobacco products to scientific and low-risk alternatives.

Buoyed by such efforts, the company generated revenues of $1,643 million from RRPs during fourth-quarter 2017, significantly higher than $343 million in the year-ago quarter. Notably, RRP revenues for 2017 represented 12.7% of the company’s overall net revenues, with major contributions from iQOS and accessories.

The company expects consistent growth in this category in the forthcoming periods, which encourages it to undertake constant investments. In fact, management expects strength in RRPs (especially iQOS) to drive the company’s currency-neutral revenue growth of more than 8% in 2018.

Cigarette Pricing to Aid Revenues

Apart from RRPs, higher cigarette pricing has also been an upside in Philip Morris’s performance for a while. Though higher pricing might lead to possible decline in cigarette consumption, it has been noted that smokers tend to absorb price increases owing to the addictive quality of cigarettes. Evidently, favorable pricing in the combustible tobacco portfolio drove year-over-year net revenue growth in 2017. Moreover, the price hikes enable the company to maintain margins at targeted levels. The company continues to expect pricing as a key growth driver in the near term.

All, said lets now take a look at the picture unveiled by the consensus marks for earnings and sales as well as the Zacks Model for the upcoming quarterly announcement.


Philip Morris International Inc. Price, Consensus and EPS Surprise

Estimates for the Quarter

The Zacks Consensus Estimate for first-quarter 2018 earnings is currently pegged at 88 cents per share, which reflects an improvement of a cent, over the last 30 days. However, earnings are anticipated to depict a decline of 10.2% from the year-ago quarter’s level.

Analysts polled by Zacks expect revenues of $6,952 million, depicting a growth of 14.6% from the prior-year period.

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 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.

The company’s Zacks Rank #3 (Hold) combined with an ESP of +0.87% make us reasonably confident of 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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