Will Philip Morris’ Efforts to Expand RRPs Fuel Growth?

As smoking rate continues to decline globally along with stringent government regulations and increasing consumer health awareness, Philip Morris International Inc. PM has been facing receding volumes in its combustible products category. Amid such conditions, the company has been striving to achieve growth and stay afloat in the industry by focusing on reduced-risk tobacco products.

Declining Cigarette Consumption Poses Concerns

Philip Morris has been witnessing deteriorating shipment volumes mainly due to receding demand for cigarettes. Moreover, consumers are opting for e-cigarettes or substitutes for cigarettes, which is affecting cigarette volume. During fourth-quarter 2017, total cigarette shipment volume fell 2.1%. We note that anti-tobacco campaigns and rigid government policies have been plaguing cigarette consumption. Government initiatives to curb tobacco consumption mainly include self-critical advertisements, use of precautionary labels on cigarette packets and lowering of nicotine levels in cigarettes.

Moreover, due to such industry headwinds, Philip Morris’ shares have lost 7.7% in the past six months, wider than the industry’s decline of 1.6%. Such actions have also been a curse for a number of firms in the multi-billion tobacco industry such as British American Tobacco BTI and Vector Group VGR.

As the cigarette category offers less hopes of revival, Philip Morris has been diverting its attention toward low risk tobacco products.

Let’s take a look into the company’s strategies to expand in this space and other factors impacting its performance.

Reduced Risk Products: A Vital Growth Platform

Serious health hazards due to cigarette smoking along with the influences of anti-tobacco campaigns have pushed consumers toward low-risk tobacco products. To meet consumers’ changing preference, Philip Morris launched the iQOS (in 2014). The launch was aimed to lead the tobacco industry’s push into RRPs that may eventually replace traditional smokes. During fourth-quarter 2017, the company generated revenues of $1,643 million from RRPs, higher than $343 million in the year-ago quarter. Notably, RRP revenues for 2017 represented 12.7% of the company’s overall net revenues, with major contributions from iQOS and accessories.

Philip Morris expects continued growth in this category in the forthcoming periods, which encourages it to make investments to support RRP expansion. In fact, management expects strength in RRPs (especially iQOS) to drive the company’s currency-neutral revenue growth of more than 8% in 2018. Moreover, the marketing and technology sharing agreement between Philip Morris and Altria Group MO for selling iQOS heated tobacco products in the United States is also expected to aid volume and sales growth. The agreement is currently submitted for review to the FDA.

All said, we expect that this Zacks Rank #3 (Hold) company’s efforts to grow in the low-risk tobacco products realm combined with a strong brand image in the industry will help it tide over teh ongoing challenges and sustain in investors' good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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