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Philip Morris (PM) Gains From Pricing Power, Hurt by Cost Woes

Philip Morris International Inc. PM looks well-positioned due to the strength of its smoke-free products. Solid pricing power has also been working well for the company amid cost inflation and low cigarette volumes.

These factors were witnessed in the first quarter of 2023, wherein management stated that it expects a top-and-bottom-line recovery in 2023, which is likely to be more weighted toward the second half. For 2023, Philip Morris expects net revenues to increase by nearly 7-8.5% on an organic basis.  For the full-year 2023, the company expects adjusted EPS in the band of $6.10-$6.22 compared with the $5.98 reported in 2022.

Excluding currency movements, the adjusted EPS is envisioned in the band of $6.40-$6.52, suggesting 7-9% growth from the year-ago period figure. For the second quarter of 2023, the company expects organic top-line growth in the high single digits.

Philip Morris International Inc. Price, Consensus and EPS Surprise

Philip Morris International Inc. price-consensus-eps-surprise-chart | Philip Morris International Inc. Quote

Key Upsides

This Zacks Rank #3 (Hold) company is progressing well with its business transformation, with smoke-free products generating 34.9% of the company’s net revenues in the first quarter of 2023. PM is well-placed toward becoming a majority smoke-free company by 2025. To this end, the company’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry.

These next-generation devices are backed by substantial scientific insights and research. Philip Morris expects such advanced and high-quality products to aid adult smokers in switching from traditional cigarettes to smoke-free options. In the first quarter of 2023, revenues from smoke-free products (excluding Wellness and Healthcare) jumped 14% (or up 2.6% on an organic basis) to $2,710 million. In the first quarter of 2023, net revenues from the Wellness and Healthcare segment rose 30.3% (or 37.9% on an organic basis) to $86 million.

In the quarter, PM witnessed continued strength in IQOS performance, along with pricing power. Total IQOS users at the end of the first quarter were estimated at roughly 25.8 million (of which nearly 18.5 million had switched to IQOS and stopped smoking). For 2023, management expects heated tobacco unit (HTU) shipment volumes of 125-130 billion units. Management expects net revenues of about $300 million for the Wellness and Healthcare segment for 2023.

Moving on, Philip Morris has been benefiting from its strong pricing power. Though higher pricing might lead to a possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases due to the addictive quality of cigarettes. Higher pricing variance was an upside to the company’s performance (mainly due to increased combustible tobacco pricing) in the first quarter of 2023.  Pricing is likely to remain a driver in 2023, wherein pricing variance is expected to be 6-7%.

Cost Concerns

Philip Morris has been battling cost-related headwinds for a while now. In the first quarter of 2023, the adjusted operating income tumbled 10.7% on an organic basis due to elevated marketing, administration and research costs, an adverse volume/mix and escalated manufacturing costs, partly compensated by favorable pricing variance.

The adjusted operating margin contracted 5.8 points on an organic basis due to cost headwinds, including global inflationary pressures on the cost of sales (mainly hurting the combustible tobacco business), supply-chain hurdles associated with the transition to ILUMA, the overall inflation of operating costs and the phasing of various investments and other costs.

Management expects certain margin pressures in the first half of 2023. In 2023, the adjusted operating margin on an organic basis is likely to decline 50-150 basis points due to persistent global inflation, transitory effects related to the ILUMA roll-out and additional growth investments. Apart from these, Philip Morris expects increased net interest costs of around $200 million in 2023 compared with the 2022 levels.

However, robust pricing actions and smoke-free portfolio strength are likely to keep working well for Philip Morris amid headwinds.

Shares of PM have declined 6.8% in the past three months compared with the industry’s drop of 7.5%.

Solid Staple Stocks

Some better-ranked stocks are Lamb Weston LW, Conagra Brands CAG and General Mills GIS.

Lamb Weston, which operates as a frozen potato product company, currently sports a Zacks Rank #1 (Strong Buy). LW has a trailing four-quarter earnings surprise of 47.6%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Lamb Weston’s current fiscal-year EPS suggests an increase of 116.8% from the year-ago reported number.

Conagra Brands, which operates as a consumer-packaged goods food company, currently sports a Zacks Rank #1. CAG has a trailing four-quarter earnings surprise of 13.2%, on average.

The Zacks Consensus Estimate for Conagra Brands’ current fiscal-year sales and earnings suggests increases of 7.1% and 16.5%, respectively, from the year-ago reported numbers.

General Mills, a food and beverage product company, currently has a Zacks Rank #2 (Buy). GIS has a trailing four-quarter earnings surprise of 8.1%, on average.

The Zacks Consensus Estimate for General Mills’ current fiscal-year sales and earnings suggests growth of 6.3% and 7.4%, respectively, from the year-ago reported figures.

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