Will Philip Morris' Cigarette Category Continue To Struggle?

Philip Morris International Inc’s (NYSE:PM) performance has been eclipsed by stringent regulations surrounding the tobacco industry. As governments across the globe strive to improve consumer health by restricting tobacco consumption, companies have been witnessing declines in cigarette sales volumes. These factors have been hurting the performance of Philip Morris’ cigarette category, which weighed on investors’ sentiment.

Evidently, this Zacks Rank #4 (Sell) stock has lost 10% in the past six months compared with the industry’s decline of 8.3%.

What’s Hurting the Cigarette Category?

Thanks to anti-tobacco initiatives by the government and growing consumer awareness regarding tobacco consumption, Philip Morris has been witnessing declining cigarette shipment volumes. During third-quarter 2017, Philip Morris’s net revenues were hurt by a 3.6% decline in combustible products. Total shipment volumes in this category also declined 4.1%. As a result, total cigarette and heated tobacco unit shipment volume fell 0.5% during the period. Notably, this marked Philip Morris’ third consecutive quarter of top- and bottom-line miss.

Let’s now take a deeper look into some of the restrictions that have been hurting the company’s combustible category’s performance.

Restrictions in Detail

The adverse impacts of tobacco consumption have led the U.S. Food and Drug Administration (FDA) to issue several restrictions surrounding the manufacturing, marketing and distribution of tobacco products. The FDA has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. In July 2017, the FDA directed tobacco makers to lower nicotine levels in cigarettes to make it less addictive. Also, the European Union and the FDA have proposed a ban on menthol in accordance with the Tobacco Control Act which essentially states that menthol cigarettes have an adverse impact on public health.

To further worsen matters, the court recently issued an order which guides cigarette companies to put up self-critical advertisements circulated through television, newspapers, social media and store displays. Through such corrective ads, tobacco companies will be forced to acknowledge the perils of smoking and also admit to the fact that cigarettes are addictive. Further, the court has directed Altria Group (NYSE:MO) and R.J. Reynolds Tobacco Co. to bear the expenses of the campaign. Apart from Philip Morris, tobacco industry headwinds have also posed challenges for other major players such as British American Tobacco (NYSE:BTI) and Vector Group (NYSE:VGR) .

Moving back to Philip Morris, the company has been striving hard to adapt with the industry condition by venturing into the reduced risk tobacco industry. However, such initiatives are yet to revive the company’s overall performance. This was reconfirmed by management’s dismal outlook. Incidentally, the industry-wide challenges compelled management to lower 2017 earnings view during third-quarter earnings release. Earnings are now expected in the range of $4.75-$4.80, lower than the previous range of $4.78 to $4.93.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Altria Group (MO): Free Stock Analysis Report

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

British American Tobacco p.l.c. (BTI): Free Stock Analysis Report

Vector Group Ltd. (VGR): Free Stock Analysis Report

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