Please ensure Javascript is enabled for purposes of website accessibility

Here's What Could Push Philip Morris Earnings Higher

By Dan Caplinger - Oct 16, 2017 at 9:32AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Growth in this key area could finally get the stock price back to record highs.

Investors in Philip Morris International (PM 0.99%) have been increasingly optimistic lately. With the success of its alternatives to traditional cigarettes and the pause in the rise in the value of the U.S. dollar, the tobacco giant has inspired many to believe that long-stagnant earnings growth could finally start to pick up again.

Philip Morris will report its third-quarter earnings on Thursday, Oct. 19, and there's a lot of enthusiasm about the company's potential to return to double-digit percentage growth on its top and bottom lines. The tobacco giant faces plenty of challenges, but it also has shown an ability to overcome similar obstacles and has strategies to foster new business opportunities. Let's take a closer look at what people expect from Philip Morris International and whether it's likely to deliver.

Stats on Philip Morris International

Analyst EPS Estimate

$1.38

Change From Year-Ago EPS

10.4%

Revenue Estimate

$7.72 billion

Change From Year-Ago Revenue

10.5%

Earnings Beats in Past 4 Quarters

1

Data source: Yahoo! Finance.

Will Philip Morris International's earnings give investors what they want?

Those who follow the tobacco stock have had mixed views about Philip Morris International's earnings prospects. On the one hand, they've boosted their views on earnings for the fourth quarter of 2017. Yet full-year projections for both 2017 and 2018 have come down marginally, reversing increases in past quarters. The stock has also come down from recent highs, falling 6% since mid-July.

Part of the reason why Philip Morris International has struggled recently has to do with negative sentiment following the cigarette maker's second-quarter results. Revenue gained at barely half the pace that investors had hoped to see, and net income was actually lower than in the year-earlier period. Shipments of cigarettes were down a whopping 7.5%, showing an acceleration in the long-term trend away from traditional tobacco products. Currency-related hits to earnings returned during the quarter, and even though the euro strengthened against the U.S. dollar, other key foreign exchange measures weighed on performance.

iQOS package, including case, heating unit, and plugs.

Image source: Philip Morris International.

The bright spot in Philip Morris' earnings recently has been the way that reduced-risk products have performed. During the second quarter, iQOS-related sales soared not only in Japan but also in Korea and throughout several markets in Europe, including Italy, Portugal, and Romania. The heated-tobacco product has a huge amount of potential, with the company expecting to roll out iQOS nationally in several markets as capacity for production picks up. Sales of iQOS are just a fraction of Philip Morris International's overall revenue, but that share is growing, and the willingness of consumers to move from smoking regular cigarettes to alternatives like iQOS could sustain a trend toward the reduced-risk product for years to come.

Indeed, Philip Morris International's sustainability report, which was released in September, shows the company's commitment to pursuing reduced-risk efforts. The report unabashedly showed Philip Morris' recognition of its past, noting that "smoking cigarettes causes serious disease" and that "we are now focusing our efforts to transform our company from a cigarette maker to a smoke-free technology leader." Some consumer advocates remain skeptical, but as a first-mover in the alternative space, Philip Morris actually has a competitive advantage that could make itself felt more fully if cigarettes go away more quickly. Investors will want to see evidence that a flood of demand for iQOS products won't lead to capacity constraints, and Philip Morris' efforts to meet that demand will need to continue in order to instill confidence among its shareholders.

In the Philip Morris earnings report, investors can expect to see traditional cigarette metrics keep falling, but the real key will be the extent to which iQOS takes up the slack. In the long run, Philip Morris needs to find a way to replace any lost cigarette sales with alternative products, and although it has made great strides, the company must keep working hard to maintain its early success and ensure that its earnings can climb higher.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
PM
$99.72 (0.99%) $0.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.