Please ensure Javascript is enabled for purposes of website accessibility

Is the Bell Tolling on Tobacco Stocks?

By Nicholas Rossolillo – Apr 27, 2018 at 7:52PM

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

A lackluster earnings report from Philip Morris may indicate that the party is finally coming to an end.

Tobacco stocks have dropped double digits since industry giant Philip Morris International (PM -3.58%) reported on its first-quarter 2018 business results. The company, which sells brands like Marlboro outside the U.S., has been dealing with declining sales volumes, as have other industry leaders like Altria (MO -1.92%) and British American Tobacco (BTI -1.33%).

New products were supposed to lead the companies into the future, but Philip Morris' report may be an early warning that there is no easy solution here.

What just happened?

Revenue excluding tobacco excise taxes increased 13.7% compared with the same period a year ago. Earnings per share declined 2% to $1.00 as cost of sales increased 20.1% and marketing, administration, and research costs increased 26.5%. The forecast for full-year 2018 earnings per share was also increased to a range of $5.25 to $5.40, a 35% to 39% increase over 2017.

All that looks positive, but tobacco stocks declined anyway. Concern arose around reported sales of iQOS, a heated-tobacco product Philip Morris first began testing in Japan and has subsequently expanded to several dozen other countries. While unit sales more than doubled over last year, quarter-over-quarter sales declined. 

Quarter

Unit Sales (billions of units)

Year-Over-Year % Increase

Q1 2018

9.57

116%

Q4 2017

15.72

325%

Q3 2017

9.73

366%

Q2 2017

6.35

449%

Q1 2017

4.44

879%

Chart by author. Data source: Philip Morris quarterly earnings.

A slow sunset on tobacco?

IQOS -- which Altria also wants to sell here in the U.S. -- and other heated products, like glo from British American Tobacco, are important because global sales volumes of cigarettes have been declining for years. According to data from research group Euromonitor, from 2012 through 2016, the number of cigarettes sold worldwide dropped about 8%. Philip Morris is no exception as volume fell 6.3% in 2017. Increasing government regulation and better education among consumers about health risks are the causes.

A picture of IQOS, a white charging box and a white tube that acts as the device the user inhales.

The Philip Morris iQOS system. Image source: Philip Morris.

Tobacco companies' revenue has increased anyway, thanks to steep price hikes that have more than offset flagging demand. That's an unsustainable trend, and big tobacco knows it. Offering another nicotine delivery system with less risk than combustible tobacco is a way to fight back against government intervention and still have a product to sell to consumers who want to quit cigarettes.

Even though Philip Morris showed big year-over-year increases in sales of its iQOS, those increases are slowing down fast, and the quarter-over-quarter decline is the first one reported. Management said to expect that trend to continue, although it still sees annual sales doubling in 2018 over 2017.

However, alternative tobacco may not be enough to push Philip Morris and friends back into growth mode. Even with the annual increase in smokeless tobacco included, total volumes of product still declined 2.3% in the first quarter. With the company signaling that adoption of iQOS could be much slower going than originally hoped for, its stock and that of its peers fell.

For big-tobacco investors, worries over falling cigarette demand are not new. What is new, though, is the worry that alternatives to smoking may not be a silver bullet. A tobacco industry in long-term secular decline is still very much in play, and Philip Morris' report just proved it.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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
$83.01 (-3.58%) $-3.08
Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$40.38 (-1.92%) $0.79
British American Tobacco p.l.c. Stock Quote
British American Tobacco p.l.c.
BTI
$35.50 (-1.33%) $0.48

*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
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

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.