Philip Morris (PM) Q3 Earnings To Gain From IQOS Products

Philip Morris International Inc (NYSE:PM) is slated to report third-quarter 2017 results on Oct 19, before the opening bell. The company’s earnings have lagged estimates in three of the trailing four quarters, with an average miss of 2.9%.

Strict regulations surrounding the promotion and marketing of tobacco products and initiatives undertaken by the government to curb cigarette consumption remain as concerns for the company. However, increased focus on reduced risk tobacco products and hiked prices are expected to keep the company afloat.

Let’s delve into some of the factors that are likely to impact third-quarter results of this renowned tobacco company.

Government Regulations Pulling Down Cigarette Volumes

Cancer and heart diseases have become rampant due to cigarette smoking. As a result, consumers have become health conscious, which has negatively impacted cigarette consumption volumes. Stringent government regulations surrounding tobacco products have also been denting the businesses of major tobacco companies such as Altria Group Inc (NYSE:MO) British American Tobacco (LON:BATS) p.l.c. (NYSE:BTI) and Vector Group Ltd (NYSE:VGR) .

Recently, Reynolds American (NYSE:RAI), which is being acquired by British American, along with Altria and other cigarette makers announced the introduction of self-critical advertisements to dissuade customers from smoking per court orders. In July, the U.S. Food and Drug Administration (FDA) urged tobacco makers to lower nicotine levels in cigarettes, as tar and other substances inhaled through smoking is detrimental to health. Additionally, the FDA has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking.

Such industry-wide headwinds have been plaguing Philip Morris’s cigarette volumes. The decline is expected to continue in the forthcoming quarters. Per the Zacks Consensus Estimate, total cigarette sales volumes for the third quarter are expected to decline 1.4%. According to estimates, total cigarette shipment volumes are expected to decline 0.02% in the third quarter, depicting an improvement from the decline of 7.5% in the preceding quarter and a decline of 2.7% in the prior-year period.

Low Risk Tobacco Products Expected to Grow

The company expects to gain from increased volumes in reduced risk tobacco products, such as e-cigarettes, HeatSticks and iQOS products. The company expects these products to continue to witness growth for the remaining two quarters of 2017. Philip Morris has also been making several investments to expand the capacity of its heated tobacco products.

Further, the marketing and technology sharing agreement between Philip Morris and Altria Group for selling the former’s iQOS heated tobacco products, is also expected to aid volume and sales growth for both companies. The agreement is currently submitted for review to the FDA. Also, Philip Morris is expected to continue gaining from increasing cigarette pricing trend.

Driven by adequate growth and strong performance of Philip Morris’s low risk tobacco products, shares of the company have surged 19.3% over the past 12 months, compared with the industry’s rise of 10.3%.

Philip Morris International Inc Price, Consensus and EPS Surprise

Which Way are Estimates Trending

A look into estimate revisions give us an idea of what analysts are thinking about the company right before the earnings release. The Consensus Estimate for the third quarter as well as for 2017 has increased by a cent, over the last seven days. Estimated earnings of $1.39 depict a year-over year growth of 10.8%. Estimated earnings of $4.86 also depict a year-over-year rise of 8.6%. Adjusted operating income is expected to surge 8.9% year over year to 3.3 billion, owing to lower cigarette volumes.

Further, analysts polled by Zacks expect revenues of $7.7 billion for the third quarter, depicting a growth of 10.3% from the prior-year period. The same for 2017 are expected to be 28.9 billion, up 8.2% from the previous year. Revenues are anticipated to rise on the back of higher pricing as well as increased volumes of heated tobacco products.

What Does the Zacks Model Unveil?

Our proven model shows that Philip Morris is likely to beat earnings estimates this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Most Accurate estimate is at $1.41 and the Consensus Estimate is pegged at $1.39. So the ensuing +0.90% ESP and the company’s Zacks Rank #3 (Hold) make us reasonably confident of an earnings beat. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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