iQOS Expected To Be A Key Growth Driver For Philip Morris

2017 can be considered to be a transitional year for Philip Morris International (NYSE:PM). The company stated its intentions to committing to a ‘smoke-free’ future, even placing ads in leading UK newspapers, claiming its ambition to “stop selling cigarettes” in the region. The development of reduced risk products, such as iQOS, has been a boon for the company, as it can help reverse the declining volumes it has been faced with recently. And it is this product that the company intends to market as one that can ultimately replace cigarettes. The increased sales of iQOS can be expected to be the main driver for revenue growth in the fourth quarter, together with higher product prices. These improved revenues, coupled with higher net income margins, should result in an over 20% growth in the earnings per share.

Shipment Volume Growth Expected

• In the fourth quarter, the company expects a shipment volume growth, driven by the continued improvement of the iQOS device sales.
• Meanwhile, cigarette volumes are expected to remain pressured, particularly in Saudi Arabia, where excise tax increases resulted in a doubling of the cigarette prices.
• Industry volume fell by 30% in Saudi Arabia in the third quarter, and is expected to remain pressured even in 2018.
• Other Gulf countries are expected to implement a similar tax structure, which will result in a poor showing there as well.

Strong Sequential Performance To Continue

• The company’s reduced risk portfolio (RRPs) recorded net revenues of $947 million in Q3, owing to the exceptional performance of iQOS devices.
• However, iQOS’ margins continue to remain negative as a result of the introductory discounts offered to accelerate switching among adult consumers.
• In Japan, the brand’s weekly offtake share trended upwards by 1.9 points to 14.6% nationally.
• The impressive performance of this device can be expected to continue in the fourth quarter as well.
• iQOS had been launched in key cities in 31 markets globally by the end of the third quarter, with more than 3.7 million adult consumers switching to the device. By the end of the year, the company had targeted the product to be present up to 35 markets globally, subject to capacity.

Operating Margins To Remain Pressured

• Industry dynamics in Saudi Arabia (as stated earlier), as well as Russia, where net pricing remains constrained due to a highly competitive environment, could pressure the margins.
• High investments supporting the commercialization of iQOS could be another factor that can strain the operating margin of Philip Morris.
• Moreover, as mentioned earlier, the margins of iQOS currently remain in the red due to the high promotional activities being carried out to improve consumer awareness.
• These factors in conjunction could result in a reduced operating margin for the company. However, in the future, as iQOS has higher margins, as compared to traditional cigarettes, they could be expected to improve the margins for Philip Morris.

We have a $119 price estimate for Philip Morris, which is higher than the current market price. The charts above have been made using our new, interactive platform. You can click here to modify different drivers, and see their impact on the EPS and price estimate for Philip Morris.

See Our Complete Analysis For Philip Morris International

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

• Why Is Korea Easier To Conquer For iQOS Than Europe?
• Philip Morris: Focusing On A Smoke-Free Future
• Philip Morris Falls On A Weak Third Quarter
• iQOS- A Product Of Innovation Or Necessity For Philip Morris?

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