Here's How Philip Morris (PM) Is Placed Ahead Of Q4 Earnings

Philip Morris International Inc. (NYSE:PM) is slated to report fourth-quarter 2019 results on Feb 6. This tobacco giant delivered a positive earnings surprise of 5.9% in the last reported quarter. Further, its earnings have outperformed the Zacks Consensus Estimate by 8.4%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for fourth-quarter earnings has been stable at $1.22 per share over the past 30 days. This suggests a decline of 2.4% from the year-ago period’s reported figure. The consensus mark for revenues stands at $7,759 million, indicating a rise of 2.4% from the figure reported in the year-ago period.

The Zacks Consensus Estimate for 2019 earnings per share stands at $5.20, suggesting a rise of almost 2% from the year-ago period’s reported figure. The consensus mark for revenues stands at $29.8 billion.

Stern Regulations Dent Cigarette Volumes

Philip Morris has been battling reducing cigarette sales volumes for a while due to stern government regulations and rising health consciousness. The Zacks Consensus Estimate for fourth-quarter cigarette shipment volumes is pegged at 178 billion units compared with 190 billion units reported in the year-ago period.

Notably, the tobacco industry has been facing many challenges as governments around the world are imposing restrictions on tobacco companies, which in turn are lowering cigarette consumption. The U.S. Food and Drug Administration (FDA) has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. Apart from this, the court wants tobacco companies to admit that cigarettes have been made addictive, through the issuance of corrective ads. To add to the woes, the FDA is bent on drastically reducing nicotine in cigarettes to minimally addictive levels. Also, the FDA had earlier announced that tobacco makers must seek marketing authorization for any tobacco product introduced after Feb 15, 2007. The law was extended by the agency to include e-cigarettes, pipe tobacco, cigars and hookah.

Battered by such factors, Philip Morris’ revenues from combustible products declined 5.7% during the third quarter. Also, total cigarette and heated tobacco unit shipment volumes inched down 2.1% to 199.5 billion units. Further, management, in its last earnings call, guided for a 1-1.5% decline in total shipment volumes (including cigarettes and heated tobacco categories) in 2019 on a like-for-like basis. Moreover, total tobacco industry volumes, excluding the United States and China, are expected to showcase a decline of 2.5%.

Pricing & RRPs Offer Respite

Philip Morris has been responding to the changing market scenario by offering reduced risk products or RRPs. In fact, the company’s IQOS, a smokeless cigarette, counts amongst one of the leading RRPs in the industry. Last year, the company launched additional versions of IQOS in Japan, which have been depicting encouraging results. Notably, strong growth in IQOS boosted revenues in the RRPs unit, which rose almost 63.4% to $1,344 million in the third quarter. The company earlier stated that it expects consistent growth in IQOS and the Heated Tobacco category.

Apart from this, Philip Morris’ strong pricing has helped it stay afloat in the industry, even in the face of declining cigarette volumes. Though higher pricing might lead to a decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. Evidently, higher pricing at the combustible tobacco portfolio has been aiding the company’s performance for a while. Hence, solid pricing and strength in RRPs are likely to have driven Philip Morris’ performance in the fourth quarter.

For 2019, management expects adjusted earnings per share of $5.14. Excluding the impacts of unfavorable currency of approximately 14 cents, management expects earnings per share growth of at least 9% to $5.28.

What the Zacks Model Unveils

Our proven model predicts an earnings beat for Philip Morris this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Philip Morris has a Zacks Rank #3 and an Earnings ESP of +2.82%.

Other Stocks With Favorable Combinations

Here are some companies you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat:

Campbell Soup (NYSE:CPB) presently has an Earnings ESP of +3.34% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hain Celestial (NASDAQ:HAIN) currently has an Earnings ESP of +5.26% and a Zacks Rank #2.

Kraft Heinz (NASDAQ:KHC) currently has an Earnings ESP of +1.33% and a Zacks Rank #3.

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