Philip Morris International (NYSE:PM) released a robust Q3 report last week, beating Wall Street’s EPS estimate and raising its prior guidance. The global tobacco powerhouse is currently capitalizing on various favorable factors that are poised to endure in the upcoming quarters. Specifically, rock-solid demand for combustibles, growing momentum in non-combustibles, and a substantial contribution to sales from Swedish Match are all benefiting the company. Accordingly, I remain bullish on the stock.
Third-Quarter Highlights – Another Resilient Trading Period
Philip Morris’ Q3 performance underscores a robust trading period that has positioned the company for a highly lucrative 2023. Its impressive net revenues of $9.1 billion reflect a substantial 13.8% year-over-year growth (or 9.3% on an FX-neutral basis), marking the most successful sales quarter in the company’s history.
Driving this commendable growth is a 2.2% increase in the combined shipment volume of cigarettes and heated tobacco units (HTUs). HTUs, in particular, witnessed a remarkable 18% surge, while cigarettes experienced a marginal 0.5% decline. The impact of an improving product mix, by the rising prominence of smoke-free products in the company’s portfolio, further contributes to this noteworthy performance. Additionally, the combustible tobacco segment enjoyed robust price growth, exceeding 9%.
Now, let’s delve into the details of each of Philip Morris’ tobacco segments!
Demand for Combustibles is Not Going Away
Investors have long speculated on the imminent decline of demand for combustibles, yet the actual downturn has unfolded as a deliberate and measured process. Contrary to these anticipations, the demand for combustibles has demonstrated remarkable resilience. Cigarette volumes, for instance, experienced only a marginal 0.5% decrease compared to the preceding year.
Simultaneously, the exceptional inelasticity inherent in Philip Morris’ business model empowered the company to leverage its unparalleled pricing prowess. In doing so, it not only mitigated the slight decline in volumes but also achieved an impressive organic growth rate of 6.2% within its Combustibles division. This growth was predominantly fueled by strategically implemented price increases, surpassing 9%, which were seamlessly absorbed by the consumer base.
Growth in Heated Tobacco Isn’t Slowing Down
Philip Morris’ Heated Tobacco segment continues to thrive, displaying no signs of slowing down. This is evident in its consistent expansion of the customer base and an impressive 18% surge in shipment volume. Notably, quarter-end data underscores a substantial increase in the total number of IQOS users, the company’s flagship electronic cigarette, reaching an impressive 27.4 million, reflecting a remarkable 40.5% increase compared to the 19.5 million users recorded last year.
Furthermore, Philip Morris has witnessed a noteworthy uptick in market share for heated tobacco units in IQOS-competitive markets, experiencing robust growth of 120 basis points and reaching an impressive 9.0%.
In fairness, it’s crucial to recognize that the shipment volume of Heated Tobacco Units (HTUs) in the quarter benefited from the positive net projected effect of distributor and wholesaler inventory movements, in contrast to the net negative impact experienced in the previous quarter. However, even when excluding this factor, the company reported a substantial 10.2% rise in adjusted in-market sales volume for HTUs, underscoring the sustained strong momentum of IQOS/Illumina.
Swedish Match Leads to Skyrocketing Oral Nicotine Division
Philip Morris not only delivered impressive results in Combustibles and Heated Tobacco but also achieved skyrocketing growth in its Oral Nicotine division, largely driven by the strategic acquisition of Swedish Match.
The company witnessed an extraordinary surge in oral product shipment volumes, escalating from 6.0 million in the previous year to an astounding 209 million, marking a remarkable 3,383% increase. Notably, nicotine pouches and Snus volumes experienced a staggering surge, escalating from 0.8 million and 4.4 million to an impressive 114.6 million and 60.3 million, respectively. The introduction of Moist Snuff as a new revenue stream further bolstered shipment volumes by 33.2 million.
With Philip Morris firmly advancing towards its mission for a smoke-free future, its dominant position in oral nicotine delivery sets the stage for a seamless transition and promises to drive sustained sales growth.
On the Way to Record Profits in Fiscal 2023
Besides robust revenue growth, Philip Morris’ Q3 report showcased a noteworthy achievement of the company as it posted record adjusted EPS of $1.67. Notably, this figure represents an impressive 20.3% increase compared to the previous year.
In light of this strong performance, management was prompted to revise its Fiscal 2023 guidance upwards. The company now anticipates currency-neutral adjusted EPS to range between $6.58 and $6.61 for Fiscal 2023. This outlook implies a substantial year-over-year growth rate of 10% to 10.5% and a new all-time high in adjusted EPS for the company.
Is PM Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Philip Morris boasts a Strong Buy consensus rating based on eight Buys and one Sell recommendation assigned in the past three months. At $108.39, the average Philip Morris stock forecast suggests 19.3% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell PM stock, the most profitable analyst covering the stock (on a one-year timeframe) is Gaurav Jain of Barclays, with an average return of 12.5% per rating and a 67% success rate.
Conclusion
In conclusion, Philip Morris’ robust Q3 performance reflects a thriving business poised for a highly lucrative Fiscal 2023. Remarkably, this success persists even in the face of persistent investor aversion to tobacco stocks.
The impressive growth in Combustibles, the relentless momentum in Heated Tobacco, and the significant contribution from the Swedish Match acquisition demonstrate the company’s adaptability and strategic foresight.
As demand for combustibles persists and the Oral Products division retains its momentum, Philip Morris is well-positioned for record profits in 2023, underlined by an outstanding 20.3% increase in adjusted EPS in Q3. In the meantime, the revised upward guidance reinforces confidence in Philip Morris’ investment case.
