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Amid Lower Cigarette Sales And Rising Vaping Business, Can Philip Morris Sustain Its Strong Revenue Growth?

Philip Morris (NYSE: PM) has been in the news lately, due to the proposed merger with its former parent Altria (NYSE: MO) and a lot of activity in the e-vapor business, with IQOS receiving FDA approval, while New York banned flavored e-cigarettes. Notwithstanding all the clamor, Trefis estimates that Philip Morris could add $1.6 billion to its total revenue base, which is expected to increase from $29.6 billion in 2018 to $31.2 billion in 2020. You can view the Trefis interactive dashboard – Philip Morris Revenues: How Does Philip Morris Make Money? – to understand the segment-wise revenue performance of the company. In addition, here is more Consumer Staples data.

Before we dive into revenue trends, it would be beneficial to have a look at the company’s business model.

a) What Does PM Offer?

The company is a leading international tobacco company, with two operating segments:

  • Combustible Products: Under this segment, the company predominantly sells American blend cigarette brands, such as Marlboro, L&M, Parliament, Philip Morris, and Chesterfield.
  • Reduced Risk Products: Under this segment PM sells its heated tobacco units such as its flagship IQOS devices.

b) Who Pays?

Philip Morris International targets its cigarette sales toward adult cigarette smoking customers. Because of restrictions on advertising and marketing in most countries, cigarette brands can only be presented to adult cigarette smokers at the retail point of purchase where customers make their final brand selection.

c) What Are The Alternatives?

The company faces intense competition from Japan Tobacco International, British American Tobacco, Imperial Tobacco, and state monopolies in several Middle Eastern and North African countries. Additionally, increasing demand for e-vapor has led to a drop in the share of major cigarette brands such as Marlboro.

Combustible Products Performance

  • Cigarette shipments have been declining over recent years, due to changing consumer preferences as more people are moving toward non-combustible offerings.
  • Volume is expected to further decline from 740 billion units to about 730 billion, which marks a loss of 10 billion units of cigarettes by 2020.
  • However, segment revenue is expected to show a very marginal growth in the next two years as the company is expected to resort to price increase to mitigate the effect of lower shipments.
  • Revenue is projected to increase from $25.5 billion in 2018 to $25.6 billion by 2020.

Reduced-Risk Products Performance

  • PM started selling heated tobacco products in 2016, with volume having increased from 7.4 billion units in 2016 to 41.4 billion units in 2018.
  • Shipments of heated products are expected to increase further, due to increasing demand for non-combustible options, along with the ongoing discounts and promotional offers.
  • Additionally, Philip Morris’ rising market share for its heated product segment in the EU region, Japan, and Russia could drive its segment revenue growth in the medium-term.
  • The FDA’s approval for marketing and sale of IQOS (PM’s flagship heated tobacco product) in the US is likely to boost segment revenues, as PM could now cater to the vast US market which is currently being dominated by JUUL.
  • Heated products volume is expected to increase from 41.4 billion units in 2018 to 55 billion units by 2020.
  • At the same time, segment revenues are also expected to see a healthy increase from $4.1 billion in 2018 to $5.6 billion in 2020, driven by rising volume and gradual phasing out of discounts and promotional offers.

To understand the importance of FDA approval for IQOS and the reduced-risk products business for Philip Morris, please refer to the Trefis analysis – Importance Of Heated Products To Philip Morris’ Stock.

PM’s Total Revenue Performance

  • For the full year, we expect net revenue to increase by 1.3% to $30 billion in 2019 from $29.6 billion in 2018, and further by 4% to $31.2 billion in 2020, as sales under the company’s heated tobacco segment are expected to pick up further.
  • Overall, the company is expected to add $1.6 billion to its revenue base by the year 2020, with $1.5 billion of this coming from the reduced-risk products division.
  • The FDA nod for the IQOS product is likely to provide the biggest boost to the company’s top line in the medium term.

Here’s a detailed comparative analysis of Philip Morris vs Altria, both of which recently called off their merger talks.

As per Philip Morris’ Valuation by Trefis, we have a price estimate of $94 per share for PM’s stock.

 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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