Philip Morris International (NYSE:PM) had a tough 2018, as the stock fell 37% amid concerns about the company's future. After investors had seen so many years of promising performance from the company's IQOS heated tobacco system, a sudden halt in growth in the key Japanese market called into question the entire long-term business strategy that Philip Morris has been following with respect to reduced-risk products.

Philip Morris expects to report its fourth-quarter earnings on Thursday, Feb. 7, and investors are nervous about what the company will say. With substantial year-over-year declines in sales and profits expected, Philip Morris will have to reassure its investors that it can find avenues for further growth and recover from its recent challenges.

Stats on Philip Morris International

Analyst EPS Estimate

$1.17

Change From Year-Ago EPS

(11.4%)

Revenue Estimate

$7.38 billion

Change From Year-Ago Revenue

(11.1%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

What investors expect from Philip Morris International

Philip Morris has generally kept investors reasonably happy in recent months about its earnings, although there have been some modest reductions in projected bottom-line figures. Investors have reduced their fourth-quarter earnings estimates by nearly 2%, and smaller cuts for the first quarter of 2019 and for the full 2019 year point to additional uncertainty about Philip Morris' future.

The big story for Philip Morris in 2018 has been IQOS, and that's likely to play a key role in the upcoming report as well. When Philip Morris announced its third-quarter results back in October, revenue was up just a fraction of a percent from year-earlier levels, and despite higher net income stemming largely from tax cuts, total shipment volumes were down 2% on an unexpectedly severe 11% drop in IQOS units shipped. However, that decline was due to adverse inventory movements among distributors, and the tobacco giant tried to reassure investors that rising market share was a long-term positive for the company.

IQOS packaging along with two devices and adapters.

Image source: Philip Morris.

More recently, though, some haven't been happy about strategic moves that Philip Morris and its peers have made. The international tobacco giant has thus far chosen to avoid making any investment into a cannabis-related company, choosing not to join former parent Altria Group (NYSE:MO) in its decision to take a large minority stake in a Canadian marijuana producer. More importantly to Philip Morris' immediate plans, Altria also chose to spend $13 billion to take a 35% stake in privately held JUUL Labs, the maker of a leading product line of e-cigarettes in the U.S. market. Altria will have exclusive rights to distribute IQOS in the U.S. if it receives approval from the U.S. Food and Drug Administration, but some saw the JUUL purchase as Altria's attempt to hedge its bets if IQOS proves unsuccessful in gaining FDA approval.

The big question that Philip Morris currently faces is whether it can win over regulators across the globe about the comparative benefits of IQOS over existing conventional cigarettes. If you take the stance that having a nicotine-delivering platform that avoids some of the harmful health impacts of smoking cigarettes is preferable to simply maintaining the status quo, then approving IQOS as a smoking alternative has a lot of appeal. If you think that nicotine itself is the problem, however, then approving a nicotine-containing substitute doesn't advance the ball.

Investors will want to look closely when Philip Morris releases its earnings report to make sure that some of the inventory-related setbacks in past quarters are in fact one-time events. Without reassurance that the IQOS strategy is still viable in the long run, it'll be hard for Philip Morris shareholders to continue to have confidence in the tobacco giant's prospects.

Dan Caplinger has 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.