Philip Morris International (PM 3.83%) has done well for shareholders so far in 2017, rising 24% even as the overall market has had to settle for single-digit percentage gains during the first few months of the year. In doing so, Philip Morris has outperformed nearly all of its major tobacco peers, both in the U.S. market as well as internationally. Although some favorable conditions in the tobacco market have played a role in Philip Morris' success, long-term investors are watching what's happening in the reduced-risk space a lot more closely, because it has the potential to be much more transformative for the company in the years and decades to come. The combination of short- and long-term considerations have combined to produce greater optimism in the stock so far in 2017.
The immediate boost for Philip Morris International
Perhaps the most important short-term impact that Philip Morris has seen is the continuing reduction in the negative impact from adverse foreign currency movements. Coming into 2017, Philip Morris had already seen less of a hit to revenue and earnings in 2016 than it had in previous years, but investors really wanted to see the strong dollar's pressure on the tobacco giant's bottom line fade away completely.
Philip Morris' fourth-quarter results didn't entirely dispel currency woes, as it said that the strong dollar cost the company about $0.13 per share in earnings during the quarter. Yet later on, Philip Morris adjusted its full-year 2017 guidance to reflect fewer anticipated currency headwinds. After that news, investors seem more comfortable that the dollar will no longer hold Philip Morris back to nearly the same extent that it has since 2014.
Image source: Philip Morris International.
How iQOS is lifting Philip Morris' long-term prospects
From a broader perspective, though, Philip Morris continues to gain momentum with its transformative initiative to emphasize reduced-risk products. Following up on its late 2016 move to file a modified-risk tobacco product application with the U.S. Food and Drug Administration, the tobacco giant submitted a premarket tobacco product application for the reduced-risk iQOS heated-tobacco platform at the end of March. The move was the latest in a step of anticipated actions from the company, which said that it hopes to gain approval to market and commercialize iQOS in the U.S. market.
Investors have been extremely happy about how iQOS has been received in other parts of the world. In particular, Japan has been quite receptive to iQOS, and the reduced-risk product has gained huge amounts of market share in a relatively short period of time in the island nation. Now that Philip Morris has opened new production facilities to boost capacity, the company will have a better opportunity to meet demand fully and to expand the breadth of iQOS availability beyond its initial test markets.
What investors hope for Philip Morris
Finally, one reason why Philip Morris has enjoyed some gains likely stems from increased attention on the space from a mergers and acquisitions standpoint. British American Tobacco (BTI 0.51%) successfully made a bid to take full control of Reynolds American (RAI), creating a global tobacco behemoth that will pose a credible competitive threat to Philip Morris. In response, some investors have hoped that Philip Morris would take steps to do a similar transaction of its own, perhaps reuniting with former U.S. parent Altria to return to the global leadership position that the companies shared for decades. How such a combination would be structured is unclear, but investors seem hopeful that some form of expanded partnership could bear fruit for the two companies.
Philip Morris International stock has done quite well in 2017, and long-term investors are hopeful about its prospects. If the company can make good on the potential for reduced-risk products to transform the industry, then Philip Morris shares could make even more progress throughout the rest of 2017 and beyond.
