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Philip Morris (PM) Set to Report Q3 Earnings: Where is the Tobacco Giant Headed?

Christopher Vargas

Philip Morris International PM is set to report their third quarter results before the opening bell on Thursday, October 17th. The international tobacco giant’s shares have risen 16.8% in 2019 thus far, outpacing the broader tobacco market’s 4% gain.

Many investors are hesitant to put their faith in a tobacco company as adult smoking rates have steadily declined in several global markets. However, some believe that the tobacco industry’s future is heading towards the development and sale of smokeless tobacco products. Let’s take a look at how Philip Morris might come out of the gates in Q3.

PM Bets on Smokeless Tobacco

Incorporated in 1987 and headquartered in New York City, Philip Morris International manufactures and sells cigarettes and other tobacco products outside the US in more than 180 countries.

The cigarette industry remains in decline; Philip Morris’ year-to-date shipment volume for cigarettes is down 1.9%, and it was off 2.8% for all of 2018. As cigarette sales continue to struggle, the tobacco giant has put its future into its heated tobacco product called IQOS.

The IQOS device uses sophisticated electronics that heat specially designed heated tobacco units. IQOS heats the tobacco just enough to release a flavorful nicotine-containing tobacco vapor without burning the tobacco.

Tobacco in cigarettes burns at around 1112 degrees Fahrenheit whereas the IQOS device heats the tobacco to about 662 degrees Fahrenheit without combustion, fire, ash, or smoke. Since the tobacco is heated instead of burned, the levels of harmful chemicals users are exposed to are significantly less than those in cigarettes. Philip Morris has seen their heated tobacco unit shipments climb 29.2% in the first six months of 2019.

Company Outlook

After talks between Philip Morris and Altria MO about a potential merger fell through, the company’s Q3 report takes on more importance as investors gauge where the company may be headed.

Our Q3 consensus estimates forecast the tobacco firm to see a 6.16% decline in earnings to $1.35 per share and for sales to jump 1.41% to $7.61 billion. Geographically, revenue in Eastern Europe/EEMA and East Asia & Australia is expected to lead the pack with respective Y/Y hikes of 24.3% and 78.1%.

The European Union is expected to rise 13.2% while sales in the South and Southeast Asia region pop 12.3%. Total cigarette shipment volume is projected to drop 5.2% in the third quarter. Looking ahead to the company’s full fiscal 2019 figures, estimates anticipate a bottom-line hike of 2% to $5.20 per share on the back of a slight 0.91% sales jump to $29.89 billion.

Philip Morris continues to bet on the steady emergence of the electronic cigarette market with the marketing of its IQOS product. The company believes that the industry will be moving towards the smokeless tobacco trend and that its IQOS product is in the best position to seize control of the emerging market.

Philip Morris’ IQOS product has a distinct advantage over other smokeless products in the industry. IQOS is FDA approved, which puts it ahead of the game as manufacturers scramble for the approval before next year when it will be mandated. Altria began marketing the IQOS under its Marlboro brand in the Atlanta area, and will use the results from the trial run to see how to best introduce the product to the rest of the US.

Bottom Line

The lead it has over e-cigarette competitors gives Philip Morris the opportunity to snag market share while other manufacturers are busy meeting regulations. However, investors are worried that the general public will clump IQOS with the rest of e-cigs as public and regulatory scrutiny rains down on the industry.

Investors should keep tabs on the ongoing investigation into the health effects of e-cigs. In the meantime, PM stock boasts a hefty 6.0% dividend yield that can provide reassuring payouts while the company figures out how best to incorporate its product in the US, which represents the world’s largest e-cig market. PM sits at a Zacks Rank #3 (Hold).

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