More than any of the big three tobacco stocks, which includes Altria (MO 1.19%) and British American Tobacco (BTI +0.85%), Philip Morris International (PM +0.99%) has found success in next-gen, heated-tobacco products.
In 2023, 36.4% of its adjusted-net revenue came from smoke-free products, up from 32.1% in 2022, and most of those sales came from IQOS, its heat-not-burn product, which now has 28.6 million users out of its total of 33 million smoke-free product users.
It also generated more than 40% of its gross profits from smoke-free products, showing the category is not only growing quickly but also delivering strong margins.
Now, Philip Morris International (PMI) is prepared to take the next step in that strategy, launching its IQOS brand in the U.S. for the first time.
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Philip Morris hopes IQOS is bigger in Texas
A Reuters report said that Philip Morris International was preparing to launch its IQOS heated-tobacco device in Austin, Texas, citing job advertisements on Linkedin.
The launch comes after a false start for IQOS under Altria, which bought the rights to sell IQOS in the U.S. in 2019. The product got Food and Drug Administration (FDA) approval, but the U.S. International Trade Commission (ITC) later ruled that IQOS infringes on two patents held by British American Tobacco.
In 2022, Altria and Philip Morris ended their agreement, giving Philip Morris commercialization rights to IQOS in the U.S., starting in April 2024, which explains the timing of its launch in Austin. Philip Morris paid $2.7 billion of the rights to sell IQOS in the U.S., showing it sees a potential gold mine selling the product stateside.
After settling the patent dispute with British American Tobacco, PMI now seems poised to capitalize on the opportunity for heated-tobacco products. PMI plans to launch in four U.S. cities in two U.S. states this year with a broader roll-out expected in 2025.
Let's take a look at three things investors should watch as the company prepares to enter the U.S. with IQOS.
The regulatory environment
The U.S. regulatory environment has proven to be a minefield for tobacco companies in recent years. Cigarette sales have steadily declined due in part to stiff excise taxes and other restrictions. Meanwhile, regulators have blown up alternatives to traditional tobacco products, like Juul. At one point, Altria owned a stake in Juul worth more than $12 billion, but it was forced to write down essentially the entirety of that stake due largely to a regulatory crackdown on the flavored tobacco pods that Juul is known for and to marketing to minors.
Philip Morris appears to have the green light to launch in the U.S., but that could change. It could also face pushback from special interest groups leery of another tobacco product on the market.
NYSE: PM
Key Data Points
Smoke-free revenue growth
Philip Morris is unlikely to break out the performance of IQOS in the U.S., but it's possible that it could move the needle on the total number of IQOS users or on smoke-free revenue growth, both of which it does report.
The company is also likely to share good news about the U.S. market, though it probably won't break out specific results from the region.
Keep an eye on the overall growth of smoke-free products and the number of IQOS users as any acceleration there, which may not come until next year, would be a sign that IQOS is taking off in the U.S. The company aims to have two-thirds of its revenue come from smoke-free products by 2030, and the U.S. likely plays a role in that forecast.
Similarly, investors may see a noticeable jump in sales and marketing spending as it pushes the new product in the U.S.
Altria's results
Finally, if Philip Morris does find success with IQOS, it's likely to have an impact on Altria. Altria dominates the U.S. market as Marlboro has roughly 50% market share in cigarettes and it's bet on NJOY as its alternative to smoking.
Altria doesn't yet break out results for NJOY, but IQOS is designed to take market share from traditional cigarettes with a less harmful product, so Marlboro sales in the U.S. are also at risk.
If the product does catch on in the U.S., it's likely to impact broader demand for cigarettes, much as Juul posed a threat in its heyday.
PMI believes it can gain a 10% share of the U.S. tobacco and heated-tobacco unit volume around 2030, which would be enough to make a dent in Altria's performance.
If Philip Morris is successful with IQOS in the U.S., the tobacco stock is also likely to respond favorably as the U.S. represents a $143.6 billion market for nicotine products.
