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All You Should Know Before Philip Morris' (PM) Q3 Earnings

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Philip Morris International Inc. (PM - Free Report) is likely to register a decline in its top and bottom lines when it reports third-quarter 2020 numbers on Oct 20. While the Zacks Consensus Estimate has moved up a cent in the past seven days to $1.35 per share, it suggests a 5.6% dip from the figure reported in the prior-year period. However, Philip Morris delivered an earnings surprise of 18.4% in the last reported quarter. Also, this tobacco giant has a trailing four-quarter earnings surprise of 7.8%, on average.

The Zacks Consensus Estimate for revenues is pegged at $7,264 million, indicating a decline of about 5% from the prior-year quarter’s reported figure.

Key Factors to Note

The coronavirus-led restrictions on traveling have been weighing on Phillip Morris’ duty-free sales. In its second-quarter earnings call, management said that it does not expect a near-term recovery in the duty-free business due to travel-related uncertainties. Further, the company expects complete enforcement of requirements for minimum retail selling price in Indonesia only by September 2020 (at the earliest).

Apart from this, Phillip Morris has been battling receding cigarette sales volumes for a while now. In the last reported quarter, shipment volumes were affected by declines in Indonesia, Philippines and Mexico, caused by pandemic-led restrictions, absence of income for daily wage earners and major price increases. In its second-quarter earnings call, management stated that in 2020, it expects a decline in total cigarette and heated tobacco unit shipment volumes to the tune of around 8-10% (on a like for like or LFL basis), mainly due to the duty-free business as well as the situation in Indonesia. Management also anticipates a 7-9% decline in total industry volumes (excluding China and the United States). These factors raise concerns for the quarter under review.

Apart from pandemic-led factors, cigarette shipment volumes are being adversely impacted by lower demand for cigarettes, stemming from anti-tobacco campaigns and consumers’ rising health consciousness. Moreover, regulatory hurdles have created limitations for marketing cigarettes, further hindering its sales volume. Nonetheless, focus on reduced-risk products (RRPs) or smoke-free products has been aiding Phillip Morris. Toward this end, the company’s IQOS, a smokeless cigarette, counts among one of the leading RRPs in the industry. We note that RRPs formed around one-fourth of the company’s total revenues in the second quarter of 2020, including about 8% contribution from IQOS devices. Management noted that since the onset of the pandemic, the switch from smoking cigarettes to RRPs has been trending positively.

Phillip Morris has also 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 owing to the addictive quality of cigarettes. Evidently, higher pricing at the combustible tobacco portfolio has been aiding the company’s performance for a while.

What the Zacks Model Unveils

Our proven model predicts an earnings beat for Philip Morris this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Philip Morris currently has a Zacks Rank #2 and an Earnings ESP of +1.11%.

Other Stocks With Favorable Combinations

Here are some other companies you may want to consider, as our model shows that these also have the right combination of elements to post an earnings beat this season.

Newell Brands (NWL - Free Report) has an Earnings ESP of +17.06% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Church & Dwight (CHD - Free Report) has an Earnings ESP of +6.71% and a Zacks Rank #2.

Nu Skin (NUS - Free Report) has an Earnings ESP of +7.07% and a Zacks Rank #2.

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