In the context of declining cigarette sales and increasing vaping activity, can Philip Morris maintain strong revenue growth?
Philip morris (NYSE: PM) has been in the headlines lately, due to the proposed merger with its former parent company Altria (NYSE: MO) and a lot of e-vapor activity, with IQOS receiving FDA approval, while New York has banned flavored e-cigarettes. Despite all the clamor, Trefis estimates that Philip Morris could add $ 1.6 billion to its total revenue base, which is expected to grow from $ 29.6 billion in 2018 to $ 31.2 billion in 2020. You can check out the Trefis interactive dashboard – Philip Morris Income: How Does Philip Morris Make Money? – to understand the revenue performance by segment of the business. In addition, here is more Basic consumption data.
Before we dive into revenue trends, it would be helpful to take a look at the business model of the company.
a) What does PM offer?
The company is a leading international tobacco company, with two business segments:
- Fuel products: In this segment, the company mainly sells brands of American blended cigarettes, such as Marlboro, L&M, Parliament, Philip Morris and Chesterfield.
- Reduced risk products: In this segment, PM sells its heated tobacco units such as its flagship IQOS devices.
b) Who pays?
Philip Morris International targets its cigarette sales at adult customers who smoke cigarettes. Due to advertising and marketing restrictions in most countries, cigarette brands may only be presented to adult cigarette smokers at the retail outlet where customers make their final brand choice.
c) What are the alternatives?
The company faces intense competition from Japan Tobacco International, British American Tobacco, Imperial Tobacco and state monopolies in several countries in the Middle East and North Africa. Additionally, the growing demand for e-vapor has resulted in a drop in the share of major cigarette brands such as Marlboro.
Performance of fuel products
- Cigarette shipments have declined in recent years, due to changing consumer preferences as more people turn to non-combustible offers.
- The volume is expected to decline further, from 740 billion units to around 730 billion, marking a loss of 10 billion units of cigarettes by 2020.
- However, the segment’s revenue is expected to show very marginal growth over the next two years as the company is expected to resort to higher prices to mitigate the effect of lower shipments.
- Revenue is expected to increase from $ 25.5 billion in 2018 to $ 25.6 billion by 2020.
Performance of reduced risk products
- PM began selling heated tobacco products in 2016, with the volume increasing from 7.4 billion units in 2016 to 41.4 billion units in 2018.
- Heated product shipments are expected to increase further, driven by increasing demand for non-combustible options, as well as ongoing discounts and promotional offers.
- Additionally, Philip Morris’ growing market share for its heated products segment in the EU region, Japan and Russia could drive revenue growth for its segment in the medium term.
- FDA approval for the marketing and sale of IQOS (PM’s flagship heated tobacco product) in the United States is expected to increase segment revenue as PM could now respond to the large United States market which is currently dominated by JUUL.
- The volume of heated products is expected to increase from 41.4 billion units in 2018 to 55 billion units by 2020.
- At the same time, the segment’s revenue is also expected to experience a sharp increase, from $ 4.1 billion in 2018 to $ 5.6 billion in 2020, thanks to the increase in volume and the phasing out of discounts. and promotional offers.
To understand the importance of FDA approval for IQOS and the activity of reduced risk products for Philip Morris, please refer to the Trefis review – Importance of heated products in the stock of Philip Morris.
Performance of total MP revenues
- For the full year, we forecast an increase in net sales of 1.3% to $ 30 billion in 2019, from $ 29.6 billion in 2018, and a further 4% to 31, $ 2 billion in 2020, as sales of the company’s heated tobacco segment are expected to continue growing. .
- Overall, the company is expected to add $ 1.6 billion to its revenue base by 2020, including $ 1.5 billion from the reduced risk products division.
- FDA approval for the IQOS product is likely to provide the biggest boost to the company’s revenue in the medium term.
Here is a detail Philip Morris vs Altria comparative analysis, who recently called off their merger talks.
According to Philip Morris review By Trefis, we have a price estimate of $ 94 per share for the PM shares.
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