3 Reasons Philip Morris International, Inc. Stock Could Rise

Despite recent challenges, Philip Morris International has reason to be excited about its future.

Dan Caplinger
Dan Caplinger
Jan 9, 2017 at 10:37AM
Consumer Goods

2016 was a reasonably good year for Philip Morris International (NYSE:PM), which gave investors a total return of almost 9% on their investment. Yet that failed to match the rise in the broader S&P 500 index, and lately, Philip Morris has had to deal with various challenges on the regulatory, macroeconomic, and financial fronts that have made some investors nervous about the future of the former Altria Group (NYSE:MO) subsidiary. Nevertheless, there are several good things that could help push Philip Morris stock higher in 2017. Let's take a closer look at three reasons Philip Morris International shares could rise.

Image source: Philip Morris International.

1. The rise in the U.S. dollar could let up in 2017.

As a U.S.-based multinational that gets all of its revenue and income from outside U.S. borders, Philip Morris is particularly sensitive to foreign currency fluctuations. During 2015, the negative impact from the strong dollar was especially large, costing the company more than $1 per share in lost earnings as well as billions of potential revenue. However, Philip Morris saw the impact from a strong dollar lessen throughout most of 2016, as the declines in many major foreign currencies finally started to let up.

Unfortunately, the strong dollar reasserted itself toward the end of 2016. Some investors are worried that a combination of tightening monetary policy from the Federal Reserve and more lax fiscal policy from the U.S. federal government could lead to sharply higher interest rates, and that would increase foreign investment in dollar-denominated fixed-income securities and push the value of the currency even higher. However, others note that the U.S. has been the strongest major economy in the world for a long time, and any awakening of economic growth in hard-hit areas like Europe and Japan could drive interest in their currencies. Even a flat performance from the dollar would be helpful for Philip Morris in supporting its earnings and making its current high dividend more sustainable.

2. Reduced-risk products could get more good news.

Philip Morris has been one of the most outspoken tobacco companies in the world in terms of the potential it sees for reduced-risk products. Indeed, the company's CEO last year said that he could envision a world in which traditional cigarettes would slowly disappear, being replaced by products that retain the positive experiences that smokers associate with cigarettes while reducing their potential harm.

Along those lines, Philip Morris filed an application with the U.S. Food and Drug Administration late in 2016, seeking approval of its iQOS heat-not-burn system. By using tobacco in specially produced HeatSticks, the iQOS system doesn't combust like a traditional cigarette, instead heating the tobacco to produce vapor that the user then inhales. Unlike liquid-based e-cigarettes, iQOS offers consumers the distinctive flavor of tobacco, and that has helped boost its popularity in initial introductions to markets like Japan. Already, Philip Morris has ramped up production of iQOS and HeatSticks to meet rising demand. If the FDA does grant approval -- or even simply allows iQOS to start on a longer process toward that eventual end -- then Philip Morris investors could get even more excited about the long-term future of the company.

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3. Merger and acquisition activity, perhaps involving Altria, could spur greater growth prospects.

There's been a lot of speculation lately about the possibility that Philip Morris could seek to buy out former parent Altria Group (NYSE:MO), reuniting the former worldwide tobacco conglomerate and giving the combined company a more effective competitive presence against its rivals. In particular, much of that speculation came when Reynolds American and British American Tobacco had similar discussions in 2016 that eventually led to a formal offer from BAT. Although that offer hasn't yet led to a final agreement, some believe it will, and at that point, Philip Morris and Altria will feel pressure to consider the same move.

It's far from certain that Philip Morris and Altria would want to recombine. The two companies have taken different tacks with their respective businesses, and even though Philip Morris and Altria have created close partnerships in areas like reduced-risk products, some investors still appreciate having the two businesses separated from each other. At the same time, though, such a move could help offset some currency risk for Philip Morris, and it's entirely possible that shares of both Altria and Philip Morris could rise in the event of a deal.

Philip Morris International stock climbed in 2016, but many shareholders would prefer to see even more success in the year to come. If these things go right for the company, it's entirely possible that the stock could rise even further in 2017.