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Philip Morris (PM) Smoke-Free Options Aid Amid Volume Concerns

Philip Morris International Inc. PM has been benefiting from its focus on a smoke-free transition amid consumers’ rising inclination toward reduced-risk products (RRPs). Markedly, smoke-free products generated 39.3% of the company’s net revenues in the fourth quarter of 2023. Philip Morris aims to generate more than two-thirds of its total revenues from smoke-free products by 2030.

Apart from this, the company enjoys pricing power as although 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. These upsides and a focus on key strategies for 2024 bode well amid elevated costs and soft cigarette volumes. For 2024, management expects net revenues to increase 6.5-8% on an organic basis.

Strategic Priorities Underway

Philip Morris highlighted its strategic priorities for 2024, which revolve around driving sustained growth and innovation across key product lines. The company’s first priority is supporting the continued success of IQOS through continuous innovation, focusing on maximizing user growth with the rollout of ILUMA and advancements in devices and consumables. The second priority is fueling the strong growth of ZYN in the U.S. market by investing strategically in commercial efforts, expanding capacity and enhancing organizational infrastructure.

Additionally, management is dedicated to expanding Philip Morris’ multi-category offering for adult nicotine users globally, with further launches of ZYN and VEEV. In the traditional combustibles space, PM is focused on maintaining a consistent market share over time despite the impact of IQOS cannibalization. Ultimately, Philip Morris’ goal for 2024 is to transform the tobacco harm reduction landscape by offering superior alternatives and supporting science-based regulations.

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IQOS, a Major Driver

Philip Morris is progressing well with its smoke-free transformation. To this end, the company’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry. In the fourth quarter, IQOS surpassed Marlboro in net revenues, becoming the leading international nicotine brand. The company expects such advanced and high-quality products to aid adult smokers in switching from traditional cigarettes to smoke-free options. IQOS ILUMA is expected to aid continued solid IQOS user growth in 2024 and ahead.

In the fourth quarter of 2023, revenues from smoke-free products (excluding Wellness and Healthcare) jumped 21.7% to $3,489 million (up 14.2% organically). In the quarter, the company witnessed continued strength in IQOS performance. Total IQOS users at the end of 2023 were estimated at roughly 28.6 million, up 3.7% year over year. This includes nearly 20.8 million who switched to IQOS and stopped smoking. In 2024, management expects an acceleration in organic smoke-free net revenues and an increase in smoke-free gross profit from the 2023 levels.

Cost & Cigarette Volume Concerns

In the fourth quarter of 2023, Philip Morris’ profits were partially hurt by increased marketing, administration and research costs (stemming from inflation), as well as escalated manufacturing costs. The company witnessed considerable inflationary pressures on leaf, direct materials and other manufacturing costs. Management expects the increased cost of leaf and wages to linger into 2024 before easing thereafter. PM is also focused on making innovation-related investments to grow its smoke-free portfolio, especially the IQOS ILUMA. These investments may impact profits.

Cigarette volumes, in general, have been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives. In the fourth quarter of 2023, total cigarette and HTU shipment volumes fell by 0.5% to 185.1 billion units. In the full-year 2023, cigarette shipment volumes declined 1.4%. In 2024, the total international industry volume for cigarettes and HTUs is estimated in the range of a decline of 2% to flat (excluding China and the United States).

For Philip Morris, the total cigarette, HTU and oral smoke-free product shipment volume increase is likely to range between flat and a rise of 1%, mainly backed by smoke-free product strength. Shares of this Zacks Rank #3 (Hold) company have declined 2.2% in the past six months compared with the industry’s decrease of 6%.

3 Appetizing Bets

The Chef’s Warehouse CHEF, which engages in the distribution of specialty food products, currently carries a Zacks Rank #2 (Buy). CHEF has a trailing four-quarter earnings surprise of 3.2%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for The Chef’s Warehouse’s current fiscal-year sales and earnings suggests growth of 8.7% and 4.7%, respectively, from the year-ago reported numbers.

Vital Farms Inc. VITL offers a range of produced pasture-raised foods. It currently carries a Zacks Rank #2. VITL has a trailing four-quarter average earnings surprise of 155.4%.

The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings suggests growth of 18.6% and 35.6%, respectively, from the year-ago reported numbers.

Utz Brands Inc. UTZ manufactures a diverse portfolio of salty snacks and currently carries a Zacks Rank #2. UTZ has a trailing four-quarter earnings surprise of 2.6%, on average.

The Zacks Consensus Estimate for Utz Brands’ current financial-year earnings suggests growth of 17.5% from the year-ago reported numbers.

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