Phillip Morris (PM) Poised for Growth on RRPs & Strong Pricing

With cigarette sales witnessing softness for a while, tobacco companies have been eyeing emerging prospects in the reduced risk products (“RRPs”) or smoke-free arena. Leading tobacco player — Philip Morris International Inc. PM — is among the industry pioneers in driving the shift from cigarettes to RRPs. Moreover, efficient pricing strategies are supporting the company’s revenues and operating income.

Courtesy of such upsides, the company’s shares have rallied 36.9% in the past three months compared with the industry’s growth of 25.2%. That said, let’s discuss the aspects that are aiding this Zacks Rank #3 (Hold) company’s performance.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Philip Morris is committed toward developing a smoke-free future by expanding offerings in the RRPs category. These products, owing to their beneficial claims, are largely being accepted by individuals trying to quit or reduce cigarette consumption. Philip Morris’ IQOS is one of the leading RRPs in the industry. IQOS was launched in the United States in 2019, through a commercial deal with Altria Group, Inc. MO that was approved by the U.S. Food and Drug Administration (FDA). We note that IQOS devices contributed nearly 7% to the company’s revenues in the RRPs category in 2020. In fact, total users of IQOS as of the end of fourth-quarter 2020 were estimated to be about 17.6 million. Strong growth in IQOS boosted revenues in the RRPs category, which increased 26.3% year on year to $1,937 million in the fourth quarter. Moreover, heated tobacco unit shipment volumes of 21.7 billion units rose 26.9% year over year.

The company expects consistent growth in the heated tobacco category. Therefore, it is committed toward expanding these products. In December 2020, IQOS 3 received authorization from the FDA for sale in the United States. The new device incorporates a number of technological improvements like enhanced battery life and quicker recharge. Among other initiatives, Philip Morris announced a partnership with South Korea’s KT&G in January 2020 to commercialize the latter’s smoke-free products outside the country. We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have also been expanding their offerings in the low-risk tobacco space.

Pricing Acts as a Strong Support

Philip Morris has long been benefiting from strong pricing power, which boosted its revenues and adjusted operating income despite unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible reduction in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes.

Evidently, higher pricing variance was an upside to the company’s performance across most regions during the fourth quarter. Favorable combustible products pricing aided the company’s adjusted operating income margin, which rose 1.7% (on an organic basis) in the quarter. Continued pricing power is likely to keep supporting the company’s performance in the forthcoming periods.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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