Shares of Philip Morris (PM) are on the rise after the company reported better-than-expected quarterly results and raised its fiscal year 2021 earnings per share guidance. The first quarter outperformance was driven by IQOS strength that helped offset cigarette shipment declines. On Monday, Philip Morris and several of its peers were under pressure, however, following media reports saying the U.S. is planning to severely reduced nicotine levels in cigarettes.
QUARTERLY RESULTS: On Tuesday, Philip Morris reported first quarter adjusted earnings per share of $1.57 and revenue of $7.59B, both above consensus of $1.40 and $7.27B, respectively. The company also said it sees second quarter earnings per share between $1.50-$1.55, with consensus at $1.53. Additionally, Philip Morris raised its fiscal year 2021 earnings per share view to $5.93-$6.03 from $5.90-$6.00. The company added that cigarette/heated tobacco unit shipment volume was down 3.7%, and that total IQOS users at quarter-end were estimated at approximately 19.1M, "of which approximately 14.0M have switched to IQOS and stopped smoking."
CEO Andre Calantzopoulos stated that "We are pleased to have delivered a very strong start to the year, with top- and bottom-line results coming in well ahead of our expectations for the first quarter despite the ongoing challenges of the pandemic. This performance was driven by the continued strength of IQOS, in particular, reflecting excellent user, volume and market share momentum, as well as further progress with manufacturing and operating cost efficiencies. Our results also benefited from the timing of specific factors, notably associated with shipments in certain markets and the phasing of commercial investments, which are expected to partially reverse in the second quarter. While the speed and shape of the global recovery from the pandemic remains uncertain, we are raising our full-year outlook, on an underlying basis, to reflect the strong results and positive momentum of the first quarter. Our guidance now represents organic adjusted diluted EPS growth of 11% to 13%, reflecting net revenue growth of 5% to 7% on the same basis."
LOWER NICOTINE LEVELS: The Biden administration is considering requiring tobacco companies to lower the nicotine levels of all cigarettes sold in the U.S. to levels at which they are no longer addictive, The Wall Street Journal's Jennifer Maloney reported on Monday, citing people familiar with the matter. Administration officials are considering the policy as they approach a deadline for declaring the administration's intentions on another tobacco question, namely whether or not to ban menthol cigarettes, the author noted.
Commenting on the news that the Biden administration is considering cutting almost all nicotine from cigarettes and banning menthol, Citi analyst Adam Spielman told investors that it would be a "severe blow" to tobacco. However, he noted that it is not yet clear that the administration will actually bring such proposals forward. In theory, a rule to make cigarettes non-addictive could have a "severe impact," but a bill would unlikely be implemented for many years, he added.
While Bank of America analyst Lisa Lewandowski acknowledged that there are "several details missing" regarding a potential nicotine bill, she argued that if IQOS Heatsticks are excluded – which she believes that it may well be given the March 2018 Advance Notice of Proposed Rulemaking classified cigarettes as "combustible cigarettes" – then this rule could accelerate the sift to oral tobacco and heated tobacco faster than anticipated.
Lewandowski highlighted that Altria's (MO) oral tobacco products enjoy higher margins than its combustible tobacco margins but its IQOS margins are likely less given its licensing agreement with Philip Morris and commercialization/trial costs. She sees the Biden/FDA plan to reduce nicotine levels as heightening the importance of investment and innovation in tobacco harm reduction products such as its UST/Helix oral tobacco business, Philip Morris/Altria’s IQOS heated tobacco system, and its investment in JUUL.
PRICE ACTION: In morning trading, shares of Philip Morris have gained over 2% to $94.06, while Altria's stock has dropped over 2% to $46.26 Also lower, British American Tobacco (BTI) has slid about 5% to $37.85. Meanwhile, shares of 22nd Century Group (XXII) have gained over 3% to $3.66.
Philip Morris
+2 (+2.18%)
Altria Group
-3.13 (-6.38%)
British American Tobacco
-2.03 (-5.13%)
22nd Century
+0.125 (+3.53%)