Will RRPs Curate A Comeback For Philip Morris (PM) In 2019?
Zacks Investment Research | Dec 27, 2018 04:33AM ET
Like most tobacco companies, it has been a tough year for Philip Morris International (NYSE:PM) . This renowned tobacco stock has lost 33.2% on a year-to-date basis compared with the industry ’s plunge of 37.9%. Matters look grim due to declining cigarette sales volumes stemming from stern government regulations and consumers’ rising health consciousness.
Amid such hurdles, the reduced risk products (RRPs) platform has emerged as the much-needed ray of hope for tobacco companies. In fact, Philip Morris’ e-cigarettes are performing well in several key markets. Moreover, higher pricing strategies bode well for the company. Let’s take a closer look at the company’s efforts to stay afloat and see if there are any chances of revival ahead.
Impressive Strides in RRPs Space
With dim prospects in the cigarette category, Philip Morris is exploring opportunities in e-cigarettes. Notably, the company is pioneering the radical shift from harmful tobacco products to scientific and low-risk alternatives by undertaking investments for research and development.
The company’s flagship brand IQOS, a heat-not-burn product, is among one of the leading RRPs in the industry. Recently, the company launched additional versions of IQOS in Japan. These next generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to facilitate adult smokers to switch from traditional cigarettes to less harmful options.
Further, to cater to rising demand for such products, Phillip Morris is undertaking plant conversions, transforming them from cigarette to RRPs manufacturing facilities. Also, the company’s marketing and technology sharing agreement with Altria (NYSE:MO) , which is currently under FDA’s review, is likely to enable the companies to tap greater opportunities in this space.
We note that e-cigarettes and similar RRPs are viewed as the future products for tobacco companies. However, the FDA is keeping close tab on the manufacturing and marketing policies of RRPs to regulate usage among youths. Other tobacco companies such as British American Tobacco (NYSE:BTI) and Vector Group (NYSE:VGR) have been expanding their presence in this arena
Higher Pricing Aids Growth
Apart from declining volumes, rising taxes on cigarettes are also a worry. To counter such limitations, Philip Morris is resorting to higher cigarette pricing. Evidently, higher pricing in the combustible tobacco portfolio drove year-over-year net revenue growth during the second and the third quarters of 2018.
Moreover, the price hikes enable Philip Morris maintain margins at the desired level. As smokers tend to absorb price increases due addiction, this strategy could be of some help in the near term.
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Can Efforts Shield Against Hurdles
We note that Philip Morris’ cigarette shipment volumes have declined 1.7%, 1.5% and 5.3% during the third, the second and the first quarters of 2018, respectively. Going ahead, management anticipates tobacco industry volumes to decline almost 2.5% in 2018. This is likely to dent the company’s overall shipment volumes. In fact, Philip Morris’ total cigarette and heated tobacco unit shipment volume are expected to drop 2% in 2018.
With increasing vigilance on tobacco products, it is hard for Philip Morris to escape from the impacts of deteriorating cigarette sales. Against such backdrop, RRPs have emerged as a game changer and are expected to support the company’s growth in some of the key international markets. However, it has yet to be seen if such strategies can help this Zacks Rank #3 (Hold) company to make a comeback in 2019.
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