Will cigarettes hurt Philip Morris Q2 earnings results?

Philip Morris International (NYSE: PM) is scheduled to report its earnings results for the second quarter of 2019 on Thursday before the market opens. The results will be hurt by currency headwinds as its cigarettes are sold in more than 180 markets. The cigarette volume could fall due to the the impact of out-switching to heated tobacco units largely from premium and mid-price cigarette brands.

The company has been aiming to ultimately replace cigarettes with smoke-free products. Marlboro, along with Bond Street, Chesterfield, L&M, Lark and Philip Morris, has remained the company’s major global cigarette brands and these contribute to the top line growth. The volume growth could depend on the strength of combustible business and smoke-free product portfolios.

During April-end, the Food and Drug Administration confirmed that IQOS is appropriate for the protection of public health and has authorized it for sale in the US. The quarterly results will include the sales of IQOS but it also include the research and development costs associated with the company’s products.

Analysts expect the company’s earnings to decrease by 6.40% to $1.32 per share and revenue will decline by 4.20% to $7.4 billion for the second quarter. In comparison, during the previous year quarter, Philip Morris reported a profit of $1.41 per share on revenue of $7.73 billion. The company has surprised investors by beating analysts’ expectations in all of the past four quarters.

For the first quarter, the company reported a 13% drop in earnings due to unfavorable currency, higher marketing, administrative and research costs, as well as higher investment behind reduced-risk products. Net revenues decreased by 2.1% year-over-year due to unfavorable volume of cigarettes, resulting from geographic mix. For the full year 2019, Philip Morris expects earnings of at least $4.87 per share and adjusted earnings excluding currency of $5.23 per share.

The tobacco industry operates in a highly regulated environment. The well-known risks of smoking have led regulators to impose significant restrictions and high excise taxes on cigarettes. Apart from this, cannabis has remained an attractive long-term investment for big tobacco, alcohol, and pharmaceutical companies. These could hinder Philip Morris growth in the future.

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