Philip Morris Above $100 Ahead of Earnings

The continuing move towards smoke-free keeps pressure on margins as inflation concerns put pressure on acquiring new customers. The stock keeps rising, though.

Consolidation and Move Away From Key Markets

After its recent acquisition of Swedish Match, Philip Morris International (PMI) is slated to return to the US market and compete with its former parent, Altria. However, PMI is ramping up its focus on alternatives to tobacco, which could put it in direct competition with the leading vape brand by sales in the US: British American Tobacco. BAT was recently urged to move its headquarters to the US, which would lead PMI to become the premier, UK-listed tobacco company.

The total sales volume of cigarettes has been declining for years, with the trend expected to continue. However, the dollar value of sales has increased as smokers switch to higher-value products, with China being the leader in this customer shift. According to Philip Morris' estimates, total industry volume will decline by 1-2% this year, excluding China and the US. Philip Morris does not provide a breakdown of the Chinese market share.

By contrast, the company's smoke-free segment (heated tobacco) posted a 21.5% gain last year in unit volume and is expected to accelerate in 2023. Already 32% of the company's revenue comes from the new segment, helping contribute to an expected 7.0-8.5% organic growth in revenue for this year. Naturally, investors will be keen to see this guidance affirmed or increased along with the earnings release.

The Bottom Line in Focus

Philip Morris' move might be supporting revenue, but over the last quarter it has seen compressed margins as it has spent more to support the tobacco alternative segments. The company saw gross margin compression of almost 300bps over the course of last year. Once again, analysts are expecting earnings to slip slightly compared to the prior quarter despite the improved sales. The consensus is for earnings of $1.35 on sales of $8.1B.

Investors will also be interested in how the integration of the recently acquired Swedish Match is going and whether synergy targets are being met. In the last earnings report, the CEO said he expected Swedish Match uni ZYN to lead business growth in the US, which would help justify the $16B price tag for acquiring the company. There will also be interest in if there is a revision to guidance based on the impact of the exchange rate, as the dollar could weaken with the Fed seen as being less aggressive this year.

PM Back Above Triple Digits

The stock price of Philip Morris has been trending higher since the low of $90.00 on March 24. There is a high likelihood the low completed a flag pattern, and the upside leg is a continuation of the larger move starting at $83.00 in September 2022. If bulls can capture the local top at $105.00, the probabilities will increase, and above there, lies $110.00 and $112.50. On the flip side, falling back under triple digits will expose the gap at $95.00 and the March swing low. Only a breakdown beneath will increase the chances of further declines toward $83.00.

Key Takeaways

Philip Morris has been focusing on alternatives to tobacco and has seen strong growth in its smoke-free segment (heated tobacco), which now accounts for 32% of its revenue. PMI's recent acquisition of Swedish Match has led to its return to the US market, where it will compete with Altria and British American Tobacco. The total sales volume of cigarettes has been declining, but the dollar value of sales has increased as smokers switch to higher-value products, particularly in China. However, margins have been under pressure due to inflation concerns and spending to support the tobacco alternative segments.