Can iQOS Continue Its Tremendous Momentum For Philip Morris In Its Fourth Quarter?

Philip Morris International (NYSE:PM) is scheduled to report its fourth quarter and full year ended December 2016 earnings on February 2, 2016, before the markets open. Declining volumes in the industry seem to be the norm, and Philip Morris is no exception to this trend. Given the change in consumer preferences, the company has slated to focus more on its reduced risk products (RRPs). Besides this, currency headwinds are also expected to weigh down on the company’s earnings. According to the company’s estimates, this factor will negatively impact the earnings by $0.35 per share for the year.

See Our Complete Analysis For Philip Morris International

Key Trends Expected In The Quarter:

• Lower Cigarette Volumes

A majority of the advanced economies are experiencing a decline in the smoking rates, and consequently the tobacco companies’ cigarette volumes have been facing a downward trend for the past few quarters. This has been a consequence of the numerous tax hikes, ban on tobacco marketing and smoking in public places, and growing awareness among the consumers. This trend is expected to continue in the fourth quarter as well. In order to cope with this, the company is focusing more on its less harmful tobacco products, in order to ensure growth in the future. On January 25, the company also reaffirmed its commitment to designing a smoke-free future. PM has hired over 400 scientists and experts, along with an investment of more than $3 billion in research, product development, and scientific substantiation for this purpose.

• Currency Headwinds

As the company is US based, but derives all its revenues from international sales, it is highly exposed to the strength of the Dollar. The company’s third quarter results had been encouraging, particularly since the unfavorable impact of the Dollar was far smaller than it had been in earlier quarters. However, the resurgence in the value of the Dollar in recent months may be troubling news for the company. Since the beginning of October, the Dollar Index has risen by more than 5%, with the Euro losing almost 5% of its value against the Dollar, and the Japanese Yen declining by an even larger amount of 12%. These factors may result in a substantial hit to the earnings of the company.

• Momentum Of iQOS

iQOS has witnessed phenomenal growth in Japan, since it was first launched, with its  market share steadily climbing. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter of FY 2016. For the third quarter, the HeatSticks market share increased to 3.5%, an increase of 1.3 points, compared to the second quarter. Furthermore, the share in the last week of September reached an estimated 4.3%, and an even higher 7.3% in Tokyo, despite limited expansion due to supply constraints. According to the latest data supplied by the company, the weekly market share increased to 4.9% in October. Moreover, the level of cannibalization has also come down, from 40% seen earlier, to 35% in the second quarter.

Given the strong growth seen by the product, Philip Morris, with Altria, has also filed a Modified Risk Tobacco Product Application (MRTPA) for iQOS with the US FDA. According to Reuters, Philip Morris is the first company to seek US approval to market a tobacco product as being less harmful than traditional cigarettes since the new laws were introduced. Once the MRTP claim is approved by the FDA, the company will hold a significant marketing advantage over other reduced risk tobacco products, including ecigarettes, which are not allowed to make such a claim. They can, however, request approval from the FDA for this status as well, so long as they are less harmful. The company believes that since its products heats the tobacco, instead of burning it, it will be safer for consumers. IQOS is currently present in key cities in 15 markets worldwide, including Japan, Canada, Germany, Italy, and the UK, with plans to make it available in key cities in over 30 countries by the end of 2017.

• Margin Expansion

According to Wall Street expectations, Philip Morris is estimated to post a gross margin, EBIT (earnings before interest and tax) margin, and net margin of 63%, 40.7%, and 26%, respectively. For the fourth quarter in the prior year the margins were 62.8%, 30.8%, and 19.6%, respectively, which represents year-on-year growth of 0.2%, 9.9%, and 6.4%, respectively. This expansion is expected to occur due to higher cigarette prices, increased sales of reduced-risk products, which have higher margins, as well as reduction in SG&A expenditure. In the fourth quarter of FY 2015, the expenses trended higher due to the implementation of European tobacco products directive. Since this is already under implementation, the expenses for this quarter should be lower.

Have more questions on Philip Morris? See the links below:

• How Is Philip Morris Working Towards A Smoke-Free Future?
• How Will A Ban On Foreign Tobacco Investment In India Affect Philip Morris?
• EU Comes Up With A Plan To Prevent Illicit Cigarette Trade
• Is Japan The New Battleground For Tobacco Firms?
• Forecasting An End Of Cigarettes, Philip Morris Launches iQOS In The UK
• BAT’s Possible Acquisition Of Reynolds To Shake Up The Tobacco Industry
• Philip Morris Q3 2016: Flat Earnings Driven By Shipment Volume Decline
• Will Philip Morris Beat Expectations This Earnings Season?
• What Factors Will Ensure Growth For Philip Morris In Asia?
• Philip Morris Disappoints Investors With Its Dividend Hike
• What Are The Risks Associated With Holding Philip Morris’ Stock?
• Can iQOS Be A Key Growth Driver For Philip Morris In The Future?
• Philip Morris Q2 2016 Earnings: Currency Headwinds Leave The Company Flat
• How Will Philip Morris Perform In Q2 2016?
• Which Is A Better Dividend Bet – Altria Or Philip Morris?
• What Is The State Of The Illicit Cigarette Market In The European Union?
• How Will The Brexit Impact Philip Morris?
• What Effect Will The Plain Packaging Ruling In Canada Have On Philip Morris?
• What Effect Will A Tobacco Tax Hike Have In New Zealand?
• How Will Philip Morris Perform In 2016?
• Why Has Philip Morris’ Price Risen ~17% This Year Despite An Earnings Miss?
• Philip Morris Misses Q1 Revenue And EPS Estimates
• Will Philip Morris Beat Expectations This Earnings Season?
• How Did Philip Morris Perform In Russia, Given The Currency Headwinds And Excise Tax Rise?
• How Has Philip Morris Fared In Comparison To Its Peers?
• How Will Philip Morris’ Revenue And EBITDA Change In The Next 3 Years?
• Philip Morris: Year 2015 In Review
• What is Philip Morris’ Fundamental Value Based On Expected 2016 Results?
• What is Philip Morris’ Revenue And EBITDA Breakdown?

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