Philip Morris (PM) benefits from price strength and focus on RRPs – April 5, 2022

Philip Morris International Inc. (PM Free Report) appears to be well positioned, with the company gaining on its strong pricing power. Additionally, the focus on Reduced Risk Products or RRPs has spurred the company’s growth. For 2022, Phillip Morris expects adjusted net revenue to grow by nearly 4% to 6% on an organic basis. However, low cigarette volumes and some headwinds related to the pandemic are concerning.

Let’s take a closer look.

Factors supporting Philip Morris

The company has long benefited from its strong pricing power, which has helped its revenue and adjusted operating income, even in the face of an unfavorable tax environment and low cigarette volumes. Although higher prices may lead to a possible decline in cigarette consumption, it is found that smokers tend to absorb price increases due to the addictive quality of cigarettes. A higher price differential was a benefit to business performance in most regions in the fourth quarter of 2021. During the quarter, the top and bottom results improved year-over-year and exceeded the respective Zacks consensus estimate. PM benefited from better IQOS user growth, better market share for cigarettes, portfolio improvement efforts and reduced pandemic drags in several markets.

The company is also making good progress in its business transformation, with smoke-free products generating more than 30% of the company’s net revenue in the fourth quarter of 2021. The company is well positioned to become a majority smoke-free company by 2025 The company’s IQOS, a non-burning device, is one of the leading RRPs in the industry. In the United States, IQOS was launched in 2019 under a commercial agreement with Altria which was approved by the FDA. These new generation devices are based on substantial scientific knowledge and research.

IQOS helped boost RRP category revenue, which grew 23.4% to $2,391 million. Additionally, heated tobacco unit shipment volumes of 25.4 billion units were up 17% year-over-year. However, IQOS is not currently available for sale in the United States due to an import ban and cease and desist order from the United States International Trade Commission (ITC) . Among other initiatives, Philip Morris announced a partnership with South Korea’s KT&G; in January 2020 to market the latter’s smoke-free products outside the country. In February 2021, the company revealed plans to generate at least $1 billion in annual net revenue from “Beyond Nicotine” products by 2025. As part of the strategy, Philip Morris made three significant buyouts in the third quarter of 2021, including Vectura Group plc. , Fertin Pharma A/S and OtiTopic.

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Obstacles in the way

As mentioned above, on November 29, 2021, an import ban and cease and desist order was imposed by the US ITC regarding IQOS Platform 1 products. counterfeit consumables and components. Therefore, IQOS is not currently available for sale in the United States. While Philip Morris has contingency plans underway (such as domestic production), it expects to be able to restart supply to the United States in the first half of 2023.

Additionally, during its fourth quarter 2021 earnings call, management emphasized that going into 2022, it expects continued uncertainty regarding the pace of recovery from the pandemic-induced operating landscape. Management expects a gradual and continued recovery of duty-free business outside of Asia and no significant recovery in Asia.

Apart from this, cigarette volumes in general have been affected by increasing consumer health awareness and shift to low-risk tobacco alternatives. In 2022, the total volume of the international industry is expected to decline by almost 1% to 2%, excluding China and the United States. On its fourth quarter earnings call, PM said it expects total unit shipment volume of cigarettes and heated tobacco in 2022 to grow between a decline of 1% and an increase of 1%.

However, we believe that the advantages mentioned above are likely to fuel the growth of this tobacco player. Shares of this No. 3 Zacks Rank (Hold) company are up 2.3% over the past six months, compared to an 11.5% rise in the sector.

A popular choice from the same industry is Altria Group, Inc. (MO Free Report), which also benefited from its strong pricing power and focus on oral tobacco products, like on!. For 2022, Altria expects 4% to 7% growth in net income, which should be more weighted towards the second half. This tobacco giant currently carries a Zacks rank of No. 3. MO shares are up 17.7% over the past six months. Zacks’ consensus estimate for the company’s current-year earnings per share (EPS) suggests growth of about 5% from the figure reported a year ago.

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Some higher ranked stocks are Tyson Foods (TSN free report) and Flowers Food (FLO free report).

Tyson Foods, a renowned meat products company, currently boasts a Zacks #1 (Strong Buy) rating. Shares of Tyson Foods have jumped 15.5% in the past six months. You can see the full list of today’s Zacks #1 Rank stocks here.

Zacks’ consensus estimate for Tyson Foods’ current-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the figure reported a year ago. TSN has a four-quarter earnings surprise of 32.2% on average.

Flowers Foods, the producer and marketer of packaged baked goods, currently holds a No. 2 (buy) Zacks rank. Shares of Flowers Foods are up 6.9% over the past six months.

Zacks’ consensus estimate for Flowers Foods sales and EPS for the current fiscal year suggests growth of 7.2% and about 4%, respectively, from the figure reported a year ago. FLO has a four-quarter earnings surprise of around 9%, on average.