Philip Morris: Q2 Earnings Miss, Zyn US Volumes Below Expectations

Philip Morris International's Q2 Zyn US volumes were lower than expected, causing the stock to decline. Despite this, investors see this as an opportunity to buy. The company's quality growth and future prospects are expected to drive the stock forward.

In a recent quarterly report, Philip Morris International (PM) revealed that its Zyn US volumes fell short of expectations for the second quarter, resulting in a decline in the stock price. Despite this setback, investors view the situation as an opportunity to buy, given the company's strong track record of quality growth and promising future prospects.

The company's pivot towards smoke-free products, particularly through its Zyn brand, has been a key driver of growth. According to the company's Q2 results, gross margin in the smoke-free business (SFB) segment is 69%, compared to 66% for combustibles. The unit economics of SFB, at $0.06 per unit, are significantly higher than those of combustibles, which are less than $0.03 per unit [1]. This indicates that for every cigarette substituted by a nicotine pouch or IQOS stick, gross profit doubles.

Investors are encouraged by the company's continued growth in the SFB segment, which is expected to offset or even surpass the decline in combustible volumes. The company's Q2 results led to an upward revision in full-year EPS guidance, with the midpoint now expected to grow at 14% [1].

Looking ahead, investors should focus on several key performance indicators (KPIs) to assess PM's progress. These include consistently positive volume growth in SFB, a gross margin share of SFB surpassing 50%, and sustained unit economics of SFB at around $0.06 per unit. The international expansion of Zyn, particularly in the US, is also crucial for diversifying SFB revenues and gross profits [1].

In terms of valuation, PM is seen as an exception among big tobacco companies that can become growth stocks. The company's growth is led by the higher-margin SFB category, with IQOS and Zyn being key contributors. The market has taken notice, with multiples expanding to reflect solid growth expectations [1].

However, there are risks to consider. The global acceptance of SFB products may take time, and uniform regulation could lead to increased taxation, affecting gross margins. Additionally, the company faces competition in modern oral and heated tobacco products, as well as in the vapor market [1].

In conclusion, while PM's Q2 Zyn US volumes missed expectations, the company's strong fundamentals and growth prospects in the SFB segment make it an attractive long-term investment. Investors should closely monitor the company's progress against the outlined KPIs and remain vigilant to potential risks.

References:
[1] https://seekingalpha.com/article/4817469-philip-morris-quality-growth-and-what-to-look-for-going-forward