Philip Morris International Inc. (NYSE:PM) saw a 4.2% increase following the announcement of Q2 2022 financial data on Thursday (July 21).
The results for Q2 2022 reflect the rare events that have negatively impacted PM this year, particularly the decline in revenue from Russia and Ukraine and the steep increase in the value of the dollar.
Absent these, PM’s businesses have continued to be driven by excellent fundamentals, and the projection for the entire year 2022 has been raised on an organic basis.
On a standalone basis, according to some analysts, the company may provide a total return of 44% (12.2% annually), and the impending acquisition of Swedish Match (OTCPK:SWMAY) could add even more value.
The Argument for Philip Morris
Reduced Risk Products (“RRP”) and a robust tobacco business are both part of Philip Morris International Inc. (NYSE:PM).
Analysts anticipate that PM’s cigarette business will remain stable, barring instances where its own RRPs undermine sales. Additionally, they think PM’s IQOS will maintain its leadership in the Heat-Not-Burn (HNB) category, expand significantly in Europe, and at the very least maintain stability in Japan.
Since 2020, PM has also introduced its own e-vapor products and, on a limited basis, has entered the market for nicotine pouches.
Additionally, PM has consented to purchase Swedish Match, and the deal is anticipated to finalize in Q4. Swedish Match specializes in marketing oral tobacco products like snus, moist snuff, and nicotine pouches.
The ZYN nicotine pouch, which dominates its category, generates two-thirds of its sales in the United States.
PM intends to leverage Swedish Match’s platform to re-enter the U.S. market with select RRPs; many believe this may potentially include IQOS, should Altria’s (MO) exclusive U.S. license not be renewed through 2024. Another quarter of sales originates from its cigars business in the U.S.
Historically, Philip Morris International Inc. (NYSE:PM) sought an EPS CAGR of 8–10% (ex-currency). 2021-23 targets include a revenue CAGR of at least 5%, an average annual EBIT margin uplift of 150 bps or more, and an EPS CAGR of at least 9%, all of which were presented during the February 2021 investor day (excluding currency).
Russia-Ukraine Conflict to Continue to Affect Revenue
Philip Morris International Inc. (NYSE:PM) currently anticipates achieving the same growth rates from 2021 to 2023 using rebased profits that omit these nations due to the loss of earnings from Russia and Ukraine as a result of the conflict in those countries.
Results for Q2 2022 demonstrate the persistence of PM’s current business, notwithstanding the impact of macro challenges.
Philip Morris International Inc. (NYSE:PM) experienced strong volume growth and revenue growth that was currency-neutral in Q2 2022. However, due to margin contraction and taking currency into account, both revenues and EBIT decreased year over year.
Without supply chain issues, such as a delay in HTU shipments to Japan, which was partially caused by the loss of planned manufacturing capacity in Russia, PM’s output may have increased even more in Q2.
Total shipments also outpaced IMS growth by 0.8 ppt (3.0% vs. 4.2%), while HTU shipment volume climbed by just 7.4%, far below IMS growth of 19.9%.
Margin Affected by Several Rare Occurrences
As device sales are low margin, the cost of goods sold for ILUMA consumables is still being optimized, and the roll-out required extra investments, the introduction of the new ILUMA device to new markets was unfavorable.
Supply chain problems, which required an additional $80 million in air freight costs, were another contributing factor. Cost of Goods Sold increased by 4% as a result of general inflation in many sectors.
PM does have a number of strategies for reducing cost pressure. On a pro forma basis, the price of combustibles increased by 3.5% or “nearly 5%” without Indonesia. The mix shift in favor of RRPs has kept margins healthy. Additionally, PM has saved $2 billion in gross costs so far, with significant potential still untapped.
The management still anticipates a flat or rising Adjusted EBIT margin in 2022, but with Q4 seeing the majority of the growth. In Q3, resistance is anticipated to lessen, although the advantage is anticipated to be offset by increased investments.
Rising Organic Outlook for 2022
As a result of Q2 performance, Philip Morris International Inc. (NYSE:PM) increased its organic 2022 outlook; organic Adjusted EPS growth is now anticipated to be 10-12% (from 9-11%), with better-than-expected volume growth (now 1.5-2.5%, from 0-1%).
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