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Philip Morris Gains on RRPs & Pricing Amid Low Cigarette Sales
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Sales volumes across the tobacco industry are hurt by COVID-19 led restrictions and reduced global travel adversely impacting duty-free sales. Philip Morris International Inc. (PM - Free Report) hasn’t been any exception to this scenario, as depicted by the company’s second-quarter 2020 results. The company reported dismal revenues across most operating regions. Also, anti-tobacco campaigns and rising health consciousness have been deterring cigarette sales.
Nevertheless, the company is striving to recover lost ground on the back of pricing power and growing popularity of its reduced risk products (RRPs), such as IQOS. Well, these aspects have been keeping the company afloat, amid the current crisis. Let’s take a closer look.
Focus on RRPs Bodes Well
Philip Morris has been vouching upon building a smoke free future by expanding its RRPs category, which is an effort to aid adult smokers to switch from traditional cigarettes to other low-risk options. Markedly, consumer response towards these products have been encouraging. RRPs formed around one-fourth of the company’s total revenues in the second quarter of 2020, including about 8% contribution from IQOS devices. Heated tobacco unit shipment volumes of 18.7 billion units rose 24.3% year over year in the said quarter.
Management noted that since the onset of the pandemic, the switch from smoking to RRPs has been trending positively. On Jul 7, the FDA approved a version of IQOS’s marketing as a modified risk tobacco product (MRTP). IQOS is presently the only heat-not-burn product in the U.S. market, which has been approved by the FDA. This is expected to radically boost the business of the company.
Among other initiatives, Philip Morris announced a partnership with South Korea-based KT&G this January to commercialize the latter’s smoke-free products outside the country. In earlier developments, Philip Morris inked a deal with Canada-based Parallax that provides low-risk tobacco alternatives.
Pricing Acts as a Strong Support
Philip Morris has long been benefiting from its strong pricing power, which has aided its revenues and adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes.
Higher pricing variance was an upside to the company’s performance across most regions during the second quarter of 2020. Combustible pricing of 3.3% along with strength in RRPs and cost-efficiencies aided the company’s adjusted operating income margin in the quarter. Consistent pricing power is likely to act as an upside.
Cigarette Category Continues to Deteriorate
During the second quarter, revenues from combustible products were down 19.1% due to declines in all regions. Cigarette shipment volumes, which fell 17.6%, were affected by declines in Indonesia, Philippines and Mexico. The regions were negatively impacted by the pandemic-led restrictions, absence of income for daily wage earners and major price increases.
Declining duty-free business due to travel-related uncertainties have also been marring the sale of tobacco products. Apart from this, cigarette shipment volumes are being affected by consumers’ rising health consciousness and regulatory restrictions on marketing these products.
Bottom Line
While the company is less optimistic regarding its combustible products portfolio, continued gains from pricing power and growth in RRPs are encouraging. Despite the ongoing pandemic, most of the company’s production facilities are now operational, including all heated tobacco unit factories. Well, these aspects are likely to continue favoring the Zacks Rank #3 (Hold) company, which has gained 13.9% in the past three months compared with the industry’s rise of 5.1%.
Consumer Staple Stocks to Bet On
Turning Point Brands (TPB - Free Report) has a Zacks Rank #1 (Strong Buy) and an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nu Skin (NUS - Free Report) , which also sports a Zacks Rank #1, has a long-term earnings growth rate of 5.6%.
Helen of Troy (HELE - Free Report) has a Zacks Rank #2 (Buy) and a long-term earnings growth rate of 6.5%.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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Philip Morris Gains on RRPs & Pricing Amid Low Cigarette Sales
Sales volumes across the tobacco industry are hurt by COVID-19 led restrictions and reduced global travel adversely impacting duty-free sales. Philip Morris International Inc. (PM - Free Report) hasn’t been any exception to this scenario, as depicted by the company’s second-quarter 2020 results. The company reported dismal revenues across most operating regions. Also, anti-tobacco campaigns and rising health consciousness have been deterring cigarette sales.
Nevertheless, the company is striving to recover lost ground on the back of pricing power and growing popularity of its reduced risk products (RRPs), such as IQOS. Well, these aspects have been keeping the company afloat, amid the current crisis. Let’s take a closer look.
Focus on RRPs Bodes Well
Philip Morris has been vouching upon building a smoke free future by expanding its RRPs category, which is an effort to aid adult smokers to switch from traditional cigarettes to other low-risk options. Markedly, consumer response towards these products have been encouraging. RRPs formed around one-fourth of the company’s total revenues in the second quarter of 2020, including about 8% contribution from IQOS devices. Heated tobacco unit shipment volumes of 18.7 billion units rose 24.3% year over year in the said quarter.
Management noted that since the onset of the pandemic, the switch from smoking to RRPs has been trending positively. On Jul 7, the FDA approved a version of IQOS’s marketing as a modified risk tobacco product (MRTP). IQOS is presently the only heat-not-burn product in the U.S. market, which has been approved by the FDA. This is expected to radically boost the business of the company.
Among other initiatives, Philip Morris announced a partnership with South Korea-based KT&G this January to commercialize the latter’s smoke-free products outside the country. In earlier developments, Philip Morris inked a deal with Canada-based Parallax that provides low-risk tobacco alternatives.
Pricing Acts as a Strong Support
Philip Morris has long been benefiting from its strong pricing power, which has aided its revenues and adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes.
Higher pricing variance was an upside to the company’s performance across most regions during the second quarter of 2020. Combustible pricing of 3.3% along with strength in RRPs and cost-efficiencies aided the company’s adjusted operating income margin in the quarter. Consistent pricing power is likely to act as an upside.
Cigarette Category Continues to Deteriorate
During the second quarter, revenues from combustible products were down 19.1% due to declines in all regions. Cigarette shipment volumes, which fell 17.6%, were affected by declines in Indonesia, Philippines and Mexico. The regions were negatively impacted by the pandemic-led restrictions, absence of income for daily wage earners and major price increases.
Declining duty-free business due to travel-related uncertainties have also been marring the sale of tobacco products. Apart from this, cigarette shipment volumes are being affected by consumers’ rising health consciousness and regulatory restrictions on marketing these products.
Bottom Line
While the company is less optimistic regarding its combustible products portfolio, continued gains from pricing power and growth in RRPs are encouraging. Despite the ongoing pandemic, most of the company’s production facilities are now operational, including all heated tobacco unit factories. Well, these aspects are likely to continue favoring the Zacks Rank #3 (Hold) company, which has gained 13.9% in the past three months compared with the industry’s rise of 5.1%.
Consumer Staple Stocks to Bet On
Turning Point Brands (TPB - Free Report) has a Zacks Rank #1 (Strong Buy) and an impressive earnings surprise record. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nu Skin (NUS - Free Report) , which also sports a Zacks Rank #1, has a long-term earnings growth rate of 5.6%.
Helen of Troy (HELE - Free Report) has a Zacks Rank #2 (Buy) and a long-term earnings growth rate of 6.5%.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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