Philip Morris International Inc. PM has been making significant strides toward a smoke-free future. With a strong pricing strategy, innovative smoke-free products and disciplined cost-saving measures, the company has maintained robust financial performance, even in the face of regulatory and currency-related challenges.

Pricing Power Driving PM’s Performance

Philip Morris’ ability to leverage strong pricing has been a key driver of its revenue and operating income growth. Smokers’ propensity to absorb price increases, given the addictive nature of cigarettes, has enabled the company to sustain revenue growth. Higher pricing variance was an upside to the company’s performance in the third quarter of 2024. Net revenues of $9,911 million increased 8.4% on a reported basis and 11.6% on an organic basis (excluding currency movements and acquisitions). The increase in organic revenues was backed by positive pricing variance (mainly driven by elevated combustible tobacco pricing) and favorable volume/mix (accountable to increased smoke-free product volumes).

PM’s Smoke-Free Transformation in Full Swing

Philip Morris’ commitment to transitioning to a smoke-free future is evident in its growing focus on reduced-risk products. Smoke-free products accounted for 38% of the company’s net revenues in the third quarter of 2024, reflecting the success of IQOS, its leading heat-not-burn device. This innovative product is backed by significant scientific research and continues to help adult smokers transition from traditional cigarettes to smoke-free alternatives. The company aims to generate more than two-thirds of its revenues from smoke-free products by 2030.

Among other initiatives, Philip Morris became the majority owner of Swedish Match on Nov. 11, 2022, which has been delivering impressive performance due to ZYN. Further, on Jan. 30, 2023, Philip Morris unveiled a long-term partnership with KT&G to commercialize the innovative smoke-free devices and consumables of the latter outside South Korea. Smoke-free revenues for 2024 are expected to have increased by double digits organically to nearly $15 billion.

Philip Morris Focused on Cost-Saving Initiatives

Philip Morris has implemented significant cost-saving measures and strategic initiatives to enhance its margins and achieve its long-term financial goals. The company achieved an organic adjusted operating margin expansion of 90 basis points in the third quarter, driven by an 80-basis-point increase in the gross margin. These results were underpinned by the higher margin contributions from the smoke-free segment, alongside productivity savings across manufacturing and back-office functions. With cumulative gross cost efficiencies reaching $490 million year to date (per the third-quarter 2024 earnings call), the company is on track to achieve its 2024-2026 target of $2 billion in savings. This disciplined cost management approach strengthens Philip Morris’ profitability and competitive positioning while supporting future growth initiatives.

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Is all Rosy for Philip Morris?

Philip Morris’ third-quarter 2024 financial performance was affected by currency fluctuations, particularly with weaknesses in the Egyptian Pound and Argentine Peso, alongside a strong Swiss Franc. This led to a 6-cent currency impact on adjusted diluted EPS. Philip Morris anticipates an ongoing unfavorable currency impact of 40 cents for the full year, making the company more vulnerable in volatile currency environments. Apart from this, strict government regulations, such as mandatory precautionary labels and self-critical advertisements hinder cigarette consumption.

Final Thoughts on PM Stock

Philip Morris’ strong fundamentals, coupled with its commitment to innovation and cost efficiencies, position the company well for sustained growth. However, challenges from regulatory restrictions and currency headwinds highlight the need for continued strategic adaptability. Investors should weigh these factors while considering Philip Morris as a potential investment, recognizing the company’s resilience in navigating a dynamic operating environment. PM currently carries a Zacks Rank #3 (Hold).

The company’s shares have rallied 11.7% in the past six months compared with the industry’s growth of 10.5%.

Some Solid Staple Bets

We have highlighted three better-ranked stocks from the Consumer Staples sector, namely United Natural Foods, Inc. UNFI, Freshpet FRPT and Tyson Foods, Inc. TSN.

United Natural currently sports a Zacks Rank of 1 (Strong Buy). UNFI delivered a trailing four-quarter earnings surprise of 553.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The consensus estimate for United Natural’s current financial-year sales and earnings suggests growth of 0.3% and 442.9%, respectively, from the year-ago period’s reported figure.

Freshpet, a pet food company, presently sports a Zacks Rank #1. FRPT has a trailing four-quarter earnings surprise of 144.5%, on average.

The Zacks Consensus Estimate for Freshpet’s current financial-year sales and earnings suggests growth of 27.2% and 228.6%, respectively, from the year-ago period’s reported figure.

Tyson Foods is a food company worldwide. It operates through four segments: Beef, Pork, Chicken and Prepared Foods. It currently carries a Zacks Rank #2 (Buy). TSN delivered a trailing four-quarter average earnings surprise of 57%.

The consensus estimate for Tyson Foods’ current fiscal-year sales and earnings indicates growth of 2% and 13.6%, respectively, from the prior-year reported levels.

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Philip Morris International Inc. (PM) : Free Stock Analysis Report

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