Philip Morris (PM) Q4 Earnings: Low Cigarette Volumes To Hurt

Philip Morris International Inc. PM is slated to release fourth-quarter and full-year 2018 results on Feb 7. The company's earnings have surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the average being 9.3%. Moreover, the company's top and bottom line have been rising year-on-year for six and five straight quarters, respectively. Let's take a look at the factors that are likely to impact this tobacco giant's upcoming quarterly announcement.

RRPs and Pricing to Continue Aiding

Reduced risk products (RRP's) are rapidly becoming popular, driven by consumers' rising health consciousness and awareness regarding the harmful impacts of nicotine. With radical investments for undertaking research and development in this space, Phillip Morris is pioneering the shift from harmful tobacco products to scientific and low-risk alternatives. In fact, the company's IQOS, a smokeless cigarette, is among one of the leading RRPs in the industry.

To continue catering to the rising demand for RRPs, the company is investing toward product and capacity expansion. Notably, the company has undertaken plant conversions by transforming them from cigarette to RRPs manufacturing facilities. We expect that such endeavors will fuel Philip Morris's performance in the upcoming quarterly release.

Apart from this, strong pricing is enabling 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 owing to their addiction, this strategy could be of some help in the near term.

Declining Cigarette Sales are Concerns

Phillip Morris' cigarette category depicts gloominess, thanks to anti-tobacco campaigns as well as regulatory hurdles such as the use of precautionary labels and self-criticizing advertisements.  These aspects are limiting the marketing of cigarettes and affecting sales volumes. Consequently, shipment volumes in the segment have been deteriorating for a while. Management had earlier projected that total cigarette and heated tobacco unit shipment volume are expected to drop 2% for 2018. This mars expectations for the impending quarter as well. Apart from Philip Morris, companies like Altria MO , British American Tobacco BTI and Vector Group VGR are also grappling with such headwinds.

With increasing vigilance on tobacco products, it is hard for Philip Morris to escape the impacts of deteriorating cigarette sales. Although RRPs are gaining traction, they are yet to emerge strong enough to battle declining cigarette volumes.

That said, let's take a look at the estimates for the upcoming quarter as well as the Zacks Model.

Estimates for the Quarter

The Zacks Consensus Estimate for fourth-quarter 2018 earnings moved down by a penny in the past 30 thirty days and is currently pegged at $1.16 per share. Moreover, this estimate reflects a decline of 11.5% from $1.31 delivered in the year-ago quarter.  

Further, the Zacks Consensus Estimate for the impending quarter's revenues is currently pegged at $7,349 million, depicting a decline of almost 11.4% from the year-ago quarter's tally.

Zacks Model

Our proven model does not show that Phillip Morris will bea t earnings estimates this quarter. A stock needs to have a positive  Earnings ESP  and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see  the complete list of today's Zacks #1 Rank stocks here .

Although Phillip Morris carries a Zacks Rank #3, its Earnings ESP of -0.61% makes us less confident about an earnings surprise. You may uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .   Enditem