Philip Morris To Build $320M Smoke-Free Product Facility

Philip Morris International Inc. (NYSE:PM) intends to invest roughly $320 million for building a Smoke-Free Product facility in Dresden, Germany. The construction is planned to start in late 2017 and will be wholly operational early 2019 onwards. The factory is likely to create jobs for nearly 500 workers and will manufacture HEETS, the tobacco units for the electronic tobacco heating device IQOS (Heatsticks that heat tobacco instead of burning it).

In fact, this plan will add Germany to the growing list of countries that also includes Italy and Switzerland, where Philip Morris produces tobacco units for IQOS. Further, IQOS has been successful in other European countries as well. The new facility in Germany is expected to further expand the company’s reach.

Moving forward, the company plans to convert the cigarette manufacturing factory of its affiliate in Greece to IQOS tobacco unit. This tobacco leader is expected have nearly 100 billion units of annual installed capacity by 2018 end.

Notably, as smoking rates have started declining in developed countries, the race to replace cigarettes is putting pressure on the tobacco industry. In fact, serious health hazards due to cigarette smoking have pushed consumers toward reduced-risk products. Therefore, to cater to the new consumer preference, Philip Morris launched the much talked about IQOS, a smokeless cigarette in Nov 2014.

This new product aims toward leading the tobacco industry’s move into reduced-risk products that may eventually replace traditional one. Philip Morris’ iQOS smokeless cigarette looks a lot like a second-generation vaporizer that uses actual tobacco in the shape of small Marlboro cigarettes called HeatSticks that are heated at high temperatures but not burned.

In March, the company also announced plans to invest approximately €300 million in order to convert one of its cigarette factory at Papastratos into a manufacturing plant for tobacco sticks for lreduced-risk product — iQOS.

IQOS are anticipated to boost market share and offset declining volumes in traditional cigarette business in 2017. The company has already launched IQOS in key cities in 24 markets globally and it further aims to expand nationally in 32 to 35 markets by the end of the year.

It is to be noted that Philip Morris had conducted various researches earlier, which showed that IQOS are safer than conventional cigarettes. Moreover, the company’s efforts to enhance its portfolio and take steps to develop smoke-free products called reduced-risk products are encouraging as customers are shifting away from tobacco products.

Philip Morris remains focused on the growing e-cigarette category and less harmful alternative tobacco products such as Heatsticks and iQOS products, and expects these products to deliver growth in 2017. In fact, its strong fundamentals are reflected in its share price movement.

This Zacks Rank #3 (Hold) company’s shares have rallied 34.5% year to date, outperforming the Zacks categorized – Tobacco industry’s gain of 23.2%. In fact, the company’s shares have hit a 52-week high of $122.98 yesterday though it eventually closed a bit lower at $122.90.

Stocks to Consider

Better-ranked stocks in the broader Consumer Staples sector include Constellation Brands, Inc. (NYSE:STZ) , MGP Ingredients, Inc. (NASDAQ:MGPI) and Aramark (NYSE:ARMK) carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Constellation Brands delivered an average positive earnings surprise of 7.7% over the trailing four quarters and a long-term earnings growth rate of 17.8%.

MGP Ingredients came up with an average positive earnings surprise of 27% over the trailing four quarters and a long-term earnings growth rate of 15%.

Aramark pulled off an average positive earnings surprise of 4.5% over the trailing four quarters and a long-term earnings growth rate of 12%.

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