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Things You Must Know Ahead of Philip Morris' (PM) Q1 Earnings

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Philip Morris International Inc. PM is scheduled to release first-quarter 2020 results on Apr 21. The company’s earnings came in line with the Zacks Consensus Estimate in the last reported quarter. Further, it delivered a positive earnings surprise of 6.5%, on average, in the trailing four quarters.

The Zacks Consensus Estimate for first-quarter earnings is pegged at $1.13 per share, which suggests 3.7% growth from the year-ago quarter’s reported figure. However, the consensus mark has moved down 4.7% in the past 30 days. The consensus mark for revenues is pegged at $6,648 million, which indicates a 1.5% dip from the year-ago quarter’s reported figure.

It is worth noting that although Philip Morris announced a temporary suspension of operations at its manufacturing facility in Bologna (on Mar 23) to contain the spread of coronavirus, it doesn’t anticipate facing any out-of-stock situation in any of its major operating income areas. Moreover, the company remains committed toward employee protection, as part of which it has implemented several measures.

Key Factors

Phillip Morris has been benefiting from its efficient pricing strategy. Higher pricing at the combustible tobacco portfolio has been aiding the company’s performance for a while. In the last reported quarter, favorable pricing boosted the top line as well as the adjusted operating income. Further, in the last earnings call, management stated that despite the anticipated hurdles in Indonesia, it expects strong pricing in 2020. We note that strong pricing has been helping the company in the face of an unfavorable tax environment and declining cigarette volumes.

Well, receding cigarette sales volume has been a hurdle for Philip Morris for quite some time now. In 2020, management expects a 2.5-3.5% drop in total cigarette and heated tobacco unit shipment volumes on an LFL basis. In fact, the company also expects a fall in international industry volumes due to higher excise taxes in Indonesia and the cigarillo category gaining traction in Japan. 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 affecting its sales volume.

To this end, the U.S. Food and Drug Administration (FDA) made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. In fact, per court orders, cigarette makers have been made to put up self-critical advertisements on television and newspapers to dissuade customers from smoking. The FDA is also bent on drastically reducing nicotine in cigarettes to minimally addictive levels.

Nevertheless, revenues from reduced risk products or RRPs have been a driver. The company has been progressing well with business transformation, with about 8% of shipment volumes and one-fifth of net revenues coming from smoke-free products, as of 2019-end. Toward this end, the company’s IQOS, a smokeless cigarette, counts among one of the leading RRPs in the industry. Notably, the marketing and technology sharing agreement between Philip Morris and Altria Group, pertaining to the sale of IQOS in the United States, has been approved by the FDA. Notably, RRPs formed close to 19% of the company’s total revenues in 2019, including about 13% contribution from IQOS devices. Among other initiatives, Philip Morris announced a partnership with South Korea’s KT&G this January to commercialize the latter’s smoke-free products outside the country.

In earlier developments, Philip Morris inked a deal with Canada-based Parallax that provides low-risk tobacco alternatives. The company expects consistent growth in IQOS and the Heated Tobacco category and therefore, remains committed toward expanding these products.

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. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Philip Morris carries a Zacks Rank #3 (Hold) and an Earnings ESP of +0.15%.

Other Stocks With Favorable Combinations

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

Clorox CLX currently has an Earnings ESP of +2.56% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Church & Dwight CHD currently has an Earnings ESP of +4.42% and a Zacks Rank #3.

Kimberly-Clark KMB has an Earnings ESP of +0.44% and a Zacks Rank #3.

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