With prudent moves to bolster presence in the low-risk tobacco space and gains from efficient pricing, Philip Morris International Inc. (PM - Free Report) has become a preferred investment pick. Well, this renowned tobacco player’s shares have gained around 34.1% in the past three months compared with the industry’s rally of 28.2%.
Let’s take a look at the factors that are driving this Zacks Rank 2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Moves to Boost RRPs Bode Well
Tobacco companies are placing their bets on reduced risk products (RRPs) such as e-cigarettes. With radical investments for undertaking research and development in this category, Phillip Morris is pioneering the radical shift from harmful tobacco products to low-risk alternatives. In fact, the company’s IQOS, a smokeless cigarette, is among one of the leading RRPs in the industry.
In October 2018, the company launched additional versions of IQOS in Japan. These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to aid adult smokers to switch from traditional cigarettes to smoke-free options. IQOS users at the end of fourth-quarter 2018 totaled 9.6 million.
Going ahead, the company expects consistent growth in IQOS and Heated Tobacco category. Further, to cater to the rising demand for such products, Phillip Morris is undertaking plant conversions. This was witnessed in the company’s Papastratos factory in Greece, for the production of HEETS — a unit used with IQOS.
Moreover, the marketing and technology sharing agreement between Philip Morris and Altria Group (MO - Free Report) is expected to boost business for the players. Currently, the agreement is under FDA review.
Additionally, Phillip Morris has inked a deal with Canada-based Parallax that provides low-risk alternatives of tobacco. Other tobacco companies like British American Tobacco (BTI - Free Report) and Vector Group (VGR - Free Report) are striving to expand in e-cigarettes and other low-risk tobacco options.
Pricing Is a Key Upside
Strong pricing is propelling Philip Morris to generate substantial revenues in the combustible category. Moreover, the price hikes enable the company to maintain margins at the desired level. As smokers tend to absorb price increases due to their addiction, this strategy could be of some help in the near term.
In addition to the aforementioned upsides, this well-known tobacco giant is likely to continue gaining from a strong brand portfolio that comprises popular names such as Marlboro, L&M, Bond Street, Parliament, Chesterfield and Virginia Slims among others. We expect such factors to continue aiding Phillip Morris and help it sustain in investors’ good books.
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