Philip Morris International Inc. (PM Quick QuotePM - Free Report) appears well-positioned, with the company gaining on its strong pricing power. Moreover, a focus on reduced risk products or RRPs has been driving growth for the company. For 2022, Phillip Morris expects adjusted net revenues to increase nearly 4% to 6% on an organic basis. However, soft cigarette volumes and certain headwinds related to the pandemic are concerns.

Let’s take a closer look.

Factors Backing Philip Morris

The company has long been benefiting from its strong pricing power, which has been aiding revenues and adjusted operating income even in the face of an unfavorable tax environment and low cigarette volumes. 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 across most regions in the fourth quarter of 2021. During the quarter, the top and the bottom line improved year over year and beat the respective Zacks Consensus Estimate. PM benefited from improved IQOS user growth, a better market share for cigarettes, portfolio enhancement efforts and reduced pandemic-led curbs in several markets.

The company is also progressing well with its business transformation, with smoke-free products generating more than 30% of the company’s net revenues in the fourth quarter of 2021. The company is well-placed toward becoming a majority smoke-free company by 2025. The company’s IQOS, a heat-not-burn device, counts among one of the leading RRPs in the industry.  In the United States, IQOS was launched in 2019 through a commercial deal with Altria that was approved by the FDA. These next-generation devices are backed by substantial scientific insights and research.

IQOS helped boost revenues in the RRPs category, which increased 23.4% to $2,391 million. Moreover, the heated tobacco unit shipment volumes of 25.4 billion units rose 17% year over year. However, IQOS is currently not available for sale in the United States due to an importation ban and a cease-and-desist order by the U.S. International Trade Commission (ITC). Among other initiatives, Philip Morris announced a partnership with South Korea’s KT&G in January 2020 to commercialize the latter’s smoke-free products outside the country. In February 2021, the company revealed plans of generating at least $1 billion in annual net revenues from "Beyond Nicotine" products by 2025. As part of the strategy, Philip Morris made three meaningful buyouts in the third quarter of 2021, including Vectura Group plc, Fertin Pharma A/S and OtiTopic.

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Hurdles on Way

As mentioned above, on Nov 29, 2021, an importation ban and a cease-and-desist order were imposed by the U.S. ITC concerning IQOS Platform 1 products. These include consumables and infringing components. Consequently, IQOS is currently not available for sale in the United States. While Philip Morris has contingency plans under action (such as domestic production), it expects to be able to restart the supply in the United States in the first half of 2023.

Further, on its fourth-quarter 2021 earnings call, management highlighted that in 2022 it expects continued uncertainty concerning the recovery pace from the pandemic-led operating landscape. Management expects continued gradual recovery in the duty-free business outside Asia and no meaningful recovery in Asia.

Apart from this, cigarette volumes in general have been affected by consumers’ rising health consciousness and a shift to low-risk tobacco alternatives. In 2022, the total international industry volume is estimated to decline nearly 1% to 2%, excluding China and the United States. On its fourth-quarter earnings call, PM stated that it expects the total cigarette and heated tobacco unit shipment volume growth in 2022 between a decline of 1% and an increase of 1%.

However, we believe that the abovementioned upsides are likely to fuel growth for this tobacco player. Shares of this Zacks Rank #3 (Hold) company have rallied 2.3% in the past six months compared with the industry’s upside of 11.5%.

A popular pick from the same industry is Altria Group, Inc. (MO Quick QuoteMO - Free Report) , which has also been benefiting from its strong pricing power and a focus on oral tobacco products, such as on!. For 2022, Altria envisions 4% to 7% growth in the bottom line, which is likely to be more weighted toward the second half.  This tobacco giant currently carries a Zacks Rank #3. Shares of MO have increased 17.7% in the past six months. The Zacks Consensus Estimate for the company’s current financial-year earnings per share (EPS) suggests growth of around 5% from the year-ago reported figure.

Looking for Consumer Staple Stocks? Check These

Some better-ranked stocks are Tyson Foods (TSN Quick QuoteTSN - Free Report) and Flowers Foods (FLO Quick QuoteFLO - Free Report) .

Tyson Foods, a renowned meat products company, sports a Zacks Rank #1 (Strong Buy) at present. Shares of Tyson Foods have jumped 15.5% in the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tyson Foods’ current financial-year sales and EPS suggests growth of 9.5% and 5.6%, respectively, from the year-ago reported number. TSN has a trailing four-quarter earnings surprise of 32.2%, on average.

Flowers Foods, the producer and marketer of packaged bakery products, currently carries a Zacks Rank #2 (Buy). Shares of Flowers Foods have risen 6.9% in the past six months.

The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales and EPS suggests growth of 7.2% and roughly 4%, respectively, from the year-ago reported figure. FLO has a trailing four-quarter earnings surprise of around 9%, on average.