Please ensure Javascript is enabled for purposes of website accessibility

Philip Morris' IQOS Still Hot Despite a Cigarette Sales Drop

By Rich Duprey - Feb 10, 2020 at 9:48AM

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

Heated tobacco devices continue to gain traction around the world.

Philip Morris International (PM -0.23%) continued to smoke analyst estimates, reporting fourth-quarter revenue and earnings that came in higher than Wall Street's projections.

As the IQOS heated tobacco device grows in popularity, Philip Morris looks for it to help the company easily meet sales and profit growth forecasts for the next two years.

Although it is expecting some country-specific headwinds, CEO Andre Calantzopoulos said in a statement, "We enter 2020 with favorable momentum, and expect to deliver like-for-like currency-neutral net revenue and adjusted diluted EPS growth this year consistent with our 2019 to 2021 compound annual growth targets of at least 5% and 8% [respectively], as well as further margin expansion."

Philip Morris CEO Andres Calantzopoulos with an IQOS device

Philip Morris CEO Andre Calantzopoulos at the IQOS 3 launch party. Image source: Philip Morris International.

Smoking alternatives heat up the market

There are now 13.6 million users of the IQOS, 4 million more than a year ago, and Philip Morris estimates 71% of them (around 10 million people) have stopped smoking and permanently switched to the device.

The heated tobacco units have become the third biggest tobacco brand behind Philip Morris' industry leading Marlboro and Imperial Brands' Winston. IQOS now has a 5.5% share of the global tobacco market, even though it hasn't been fully rolled out in a number of the 52 markets it's been introduced into. 

The real growth opportunity continues to be the U.S., where Philip Morris is working through partner Altria to get IQOS available to customers. Right now, though, it's still only in just two cities -- Atlanta, and Richmond, Virginia -- as Altria slow-walks its debut. Philip Morris says it will also seek out another marketing order from the Food and Drug Administration for its upgraded IQOS 3 device.

Under FDA rules, manufacturers have to seek out pre-marketing approval from the agency for every new device and accessory, even if mostly cosmetic. The IQOS 3 is an updated design of the original, based on consumer feedback, with a speedier recharge. And Philip Morris also developed the IQOS 3 DUO where the battery charge lasts through two uses and charges even faster than the IQOS 3.

Delayed gratification

One slight hiccup Philip Morris encountered was the introduction of its new IQOS Mesh 2.0 e-vapor product, which is more like regular electronic cigarettes in that it heats an e-liquid to create a vapor.

Because of the health scare last summer surrounding some vape products that caused dozens of deaths and thousands of lung injuries, Philip Morris held off on introducing the device and postponed its launch. 

The FDA had advised all e-cig users to stop vaping even though it had narrowed down the culprit to illicit e-liquids purchased over the internet containing vitamin E acetate from THC, the psychotropic compound in marijuana. No association with traditional e-cigs or vaping devices was found.

Yet as Calantzopoulos noted during the earnings conference call, "Unfortunately, these misperceptions, although moderating, still persist, and as such we now plan to launch in the third quarter of this year when we will also reach the optimal capacity to deploy at scale." The company expects the back half of 2020 to see a large uptake of the devices.

Mostly clear sailing

It was a solid earnings report that showed Philip Morris' focus on a smoke-free future is progressing, even though it still has a large underpinning of sales based on traditional cigarettes.

While volumes continued to decline, they were at rates less than the industry, and because of its pricing power, revenue was able to rise in the quarter for the segment. It may face some turbulence in Indonesia, however, where the industry must deal with a massive 24% tax increase.

It hurt Philip Morris' share performance, but the company looks to be able to address it by eventually passing along all the hikes, which when viewed over time, will actually be in line with historical averages.

Shares of the tobacco giant have gained about 25% since hitting a low last September, and with a still-profitable legacy business and a burgeoning smoking alternative, Philip Morris International seems able to meet the challenges.

Rich Duprey 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.

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
$99.24 (-0.23%) $0.23
Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$45.15 (0.04%) $0.02
Imperial Brands PLC Stock Quote
Imperial Brands PLC
IMBB.Y
$23.19 (0.39%) $0.09

*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
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

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.