Philip Morris (PM) Smoke-Free Unit Solid, Cigarette Volumes Low

Philip Morris International Inc. PM stands in a favorable position to continue benefiting from its range of smoke-free products and competitive pricing strategy. These upsides have been working well for this Zacks Rank #3 (Hold) company amid cost inflation and soft cigarette volumes.

Shares of this tobacco giant have risen 6.6% in the past year compared with the industry’s growth of 4.3%. The company also outpaced the broader Zacks Consumer Staples sector’s growth of 1.8% in the same period.

Factors Working Well

Consumers have been increasingly moving toward reduced-risk products (RRPs) or smoke-free alternatives, driven by the growing awareness of the health risks associated with traditional cigarette smoking. PM is progressing well with its business transformation, with smoke-free products generating 35.4% of the company’s net revenues in the second quarter of 2023.

The company is well-placed to become a majority smoke-free company by 2025. To this end, the IQOS, its heat-not-burn device, counts among one of the leading RRPs in the industry. These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to aid 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, the company witnessed continued strength in IQOS performance, along with 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). For 2023, management expects heated tobacco unit (HTU) shipment volumes of 125-130 billion units. HTU shipment volumes are likely to be about 31-33 billion units in the third quarter.

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 the expectations of strong ZYN volumes in the United States.

Philip Morris’ pricing power has been instrumental in maintaining its stability, even in the face of declining cigarette shipments. While raising prices could potentially result in reduced cigarette consumption, smokers often tolerate these price hikes due to the addictive nature of cigarettes. In the second quarter of 2023, higher pricing variance was an upside to PM’s revenue performance (mainly due to increased combustible tobacco pricing).

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Volume & Cost Concerns

The overall cigarette industry has been bearing the brunt of the inflationary environment, which has affected Adult Tobacco Consumers’ spending patterns. Cigarette volumes, in general, have also been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives.

In the second quarter of 2023, cigarette shipment volumes dropped 0.4% to 157 billion units. In 2023, the total international industry volume for cigarettes and HTUs is estimated to decline in the range of 0.5-1.5%, excluding China and the United States. For Philip Morris, cigarette shipment volumes are expected to decrease 1.5-2.5% in 2023.

PM has been battling cost-related headwinds for a while now. In the second quarter of 2023, the adjusted operating income was somewhat affected by global inflationary headwinds associated with direct materials, tobacco leaf, energy and wages. The adjusted operating margin of 39.4% contracted 1.4 percentage points year over year. The company expects to make additional growth-oriented investments, including the commercialization of ILUMA.

Wrapping Up

For 2023, PM expects net revenues to increase by nearly 7.5-8.5% on an organic basis.  For the full-year 2023, management expects adjusted EPS in the band of $6.13-$6.22 compared with the $5.98 reported in 2022. Excluding currency movements, the adjusted EPS is envisioned in the band of $6.46-$6.55, suggesting 8-9.5% growth from the year-ago period figure.

The company expects robust organic adjusted operating income growth in the second half of 2023, which is likely to fuel adjusted operating margin expansion. For the third quarter of 2023, Philip Morris expects adjusted EPS in the band of $1.60-$1.65. The EPS guidance reflects organic top-line growth in the high single digits, among other factors. The company also expects a meaningfully solid performance in the fourth quarter.

Solid Consumer Staple Bets

Inter Parfums IPAR, which manufactures, markets and distributes a range of fragrances and fragrance-related products, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

The Zacks Consensus Estimate for Inter Parfums’ current financial-year sales indicates 19.7% growth from the year-ago reported figure. IPAR has a trailing four-quarter earnings surprise of 45.9%, on average.

Helen of Troy HELE, a provider of several consumer products, currently has a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Helen of Troy’s current fiscal-year sales suggests a decline of 2.9% from the year-ago reported numbers. HELE has a trailing four-quarter earnings surprise of 8.1%, on average.

e.l.f. Beauty ELF, a cosmetic and skin care product company, currently carries a Zacks Rank #2. ELF has a trailing four-quarter earnings surprise of 108.3%, on average.

The Zacks Consensus Estimate for e.l.f. Beauty’s current fiscal-year sales suggests growth of 64.6% from the corresponding year-ago reported figure.

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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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