Phillip Morris - analyst comments on reduced risk products Citi’s Adam Spielman expects Philip Morris International Inc. (PM-N) to soon raise its volume targets for their increasingly popular smoke-free offerings, also known as Reduced Risk Products (RRPs).
Seeing that imply “an acceleration in its transformation and reinforcing expectations that organic sales growth will remain considerably above 5 per cent, probably about 6-7 per cent,” the equity analyst upgraded the company to “buy” from “neutral” and made it his preferred name in U.S. tobacco.
“PM’s current 3-year target for Reduced Risk Products is for 90-100 billion sticks in 2021. We expect a new multi-year target will be announced next year, perhaps for 150-200 billion sticks equivalent for 2024,” he said. " We are bullish because PM has consistently said that it hopes to sell more than 250 bln sticks in 2025
“This ‘aspiration’ has been published in ESG reports. It isn’t in consensus or in the price (as far as we can tell) but PM says it wants to be judged on it. We expect a burst of innovation in the next few quarters to help. (PM is due to launch Veev, its equivalent of Juul, at scale in Europe in 4Q20. We also expect that PM will upgrade iQos, introducing induction heating. Two further major technologies (Teeps and Steem) are being tested, implying full scale launches during 2021-22.).”
Mr. Spielman is now projecting Philip Morris to sell 175 billion sticks of RRPs by 2024, driving organic sales growth of 6-7 per cent and earnings per share growth of 11-12 per cent annually.
Also expecting the company to exceed its “conservative” third-quarter guidance when it reports on Oct. 16, he raised his target for its shares to US$100 from US$82. The average target is US$88.38.
“Most investors attribute the falls in tobacco to ESG-related flows; they worry that as ESG becomes bigger, the flows will get worse,” he said. “However we think the central issue has been the increase in the equity market’s duration. (This explains why tech has done so well and tobacco so badly.) This means we think the prime driver of tobacco’s underperformance has been a type of rotation, which will rotate back sooner or later, not a one-way move into ESG funds. Unless PM derates further, the EPS growth we expect (plus the dividend yield) should result in nice returns. If it rerates, which is certainly possible, the returns could be exceptional.”