What Philip Morris' Plant Conversion Could Mean For The Stock

Philip Morris International Inc. (NYSE:PM) seems to stand firm on its ambitions of developing a smoke free future, evident from its recent move to completely transform one of its cigarette production facilities in Greece for the manufacture of HEETS — a unit used with iQOS. At a time when Philip Morris, like other major tobacco players, is witnessing receding cigarette sales, the company has been tactfully keeping its ducks in a row with reduced risk products (RRPs).

Expanding in the Smoke-Free Zone

For the transformation of Papastratos factory in Greece for the production of HEETS, the company plans an investment outlay of approximately EUR 300 million. This includes construction of new buildings and replacement of cigarette manufacturing lines with advanced facilities that can produce almost 10,000 smoke-free units per minute. The transformation work is expected to be completed by the end of 2018 and is likely to create 400 new employment opportunities. Along with Papastratos, Philip Morris has a plant near Bologna in Italy, which is fully engaged in the manufacturing of smoke-free products. Further, the company plans to undertake either partial or complete transformation of its cigarette producing facilities in Russia, Korea and Romania.

Philip Morris’ endeavors in the RRPs category are praiseworthy. With investments close to $4.5 billion since 2008 for undertaking research and product development in this category, the company is leading the revolutionary move from harmful tobacco products to scientific and low risk product alternatives. While the company has been stringently working toward motivating smokers to switch to RRPs, government regulations across the globe have also been playing a major role to substantiate the change. Additionally, the marketing and technology sharing agreement between Philip Morris and Altria Group (NYSE:MO) for selling iQOS heated tobacco products in the United States is expected to aid volume and sales growth. The agreement is currently submitted for review to the FDA.

The company’s strategic efforts in the RRPs space have also been favorably impacting its overall performance. Evidently, during fourth-quarter 2017, the company generated revenues of $1,643 million from RRPs, significantly higher than $343 million in 2017. Notably, RRP revenues in 2017 represented 12.7% of the company’s overall net revenues, with major contributions from iQOS and accessories. The company expects continued growth in this category in the forthcoming periods, which encourages it to undertake constant investments to support RRP expansion. In fact, management expects strength in RRPs to drive the company’s currency-neutral revenue growth of more than 8% in 2018.

Challenges to Overcome

On the flip side, Philip Morris has been witnessing deteriorating shipment volumes mainly due to receding demand for cigarettes. Moreover, due to such headwinds, Philip Morris’ shares have lost 13.7% in the past six months, wider than the industry’s decline of 10.5%. In fact, rising consumer awareness regarding the harmful impacts of cigarette and stern government regulations have been hampering the growth of a number of firms in the multi-billion tobacco industry such as British American Tobacco (NYSE:BTI) and Vector Group (NYSE:VGR) .

Nevertheless, as a trendsetter in the low risk tobacco products arena and its effective strategies to augment the category, Philip Morris is expected to continue as one of prominent names in the industry. Such dedicated efforts not only aid in countering stringent regulations and headwinds plaguing the cigarette space, but also seem to be in the favor of society’s health and well being. Marching with such radical objectives, we expect this Zacks Rank #3 (Hold) to continue growing and also gain a place in investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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