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Can Philip Morris' (PM) RRPs Help It Tide Over Hurdles?

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With anti-smoking campaigns and strict government regulations striving to curb tobacco consumption, industry giants like Philip Morris International Inc. (PM - Free Report) have been witnessing receding cigarette sales volumes. Amid such adverse industry conditions, Philip Morris has diverted its attention to reduced risk products (RRPs) to propel growth and stay afloat in the industry.

Philip Morris Travels on the Smoke-Free Way

Rising health consciousness and adverse impacts of tobacco consumption have pushed consumers toward RRPs such as e-cigarettes, HeatSticks and iQOS products. To meet consumer’s changing preference, Philip Morris launched the iQOS (in 2014), a smokeless cigarette, in approximately 31 markets globally and catered to more than 3.7 million consumers globally, excluding the United States. In fact, courtesy of growing popularity of such products, Philip Morris generated revenues worth $947 million from RRPs during the third quarter of 2017, up from $212 million reported last year.

Further, the marketing and technology sharing agreement between Philip Morris and Altria Group (MO - Free Report) for selling the former’s iQOS heated tobacco products in the United States, is also expected to aid volume and sales growth for the companies. The agreement is currently submitted for review to the FDA.

Per sources, the FDA is currently carrying out extensive research on whether prolonged usage of iQOS products carries any detrimental impacts on health. If authorities provide a green signal to this product, it may prove to be an important milestone in the path of popularizing less harmful tobacco products in the country.   

Stringent Regulations Dent Cigarette Sales

Apart from price hikes and precautionary labels, the FDA has directed tobacco makers to lower nicotine levels in cigarettes to make it less addictive. Such efforts to check tobacco consumption lowered cigarette sales volumes globally. This weighed on the performance of major companies such as British American Tobacco (BTI - Free Report) and Vector Group (VGR - Free Report) .

Incidentally, Philip Morris’ net revenues during third-quarter 2017 were hurt by a 3.6% decline in combustible products. Total shipment volumes in this category also declined 4.1%. As a result, total cigarette and heated tobacco unit shipment volume fell 0.5%.

To make matters worse, the court recently issued an order which guides cigarette companies to put up self-critical advertisements circulated through television, newspapers, social media and store displays. Such headwinds plaguing the tobacco industry are likely to drag Philip Morris’ combustible products category performance in the forthcoming periods as well.


 

Driven by such headwinds, shares of Philip Morris fell 8.4% in the past six months, compared with the industry’s decline of 2.9%.

Final Thoughts

Nevertheless, this Zacks Rank #3 (Hold) company’s efforts to popularize iQOS products and expand sales in the reduced risk products category are laudable. Even amid adverse industry conditions, Philip Morris is likely to continue benefiting from consumers shift to cigarette alternatives in the forthcoming periods, which will help it lift investors’ optimism.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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