Philip Morris’ Smoke-Free Portfolio Continues to Outperform

Image Source: Philip Morris

By Brian Nelson, CFA

On October 21, Philip Morris (PM) reported better than expected third quarter results with both revenue and non-GAAP earnings per share exceeding the consensus forecasts. Third quarter net revenues increased 5.9% on an organic basis, reflecting higher combustible tobacco pricing and favorable volume/mix driven by higher smoke-free products volume, offset in part by lower volumes and unfavorable mix for cigarettes. Philip Morris’ shipment volume increased 0.7% with smoke-free product (SFP) volumes up 16.6%, with all SFP categories growing strongly. Cigarette volumes declined 3.2%, with weakness in all regions. Adjusted operating income increased 7.5% on an organic basis. Adjusted diluted earnings per share grew 17.3%, to $2.24, and by 13.1% excluding currency.

Management had the following to say about the quarter:

In the third quarter, we continued to invest in the growth of our increasingly profitable smoke-free business, while achieving record quarterly smoke-free gross profit and adjusted diluted EPS.

Our global smoke-free portfolio is outgrowing the industry by a clear margin, driving positive total volumes, strong top-line growth and impressive margin expansion.

We are on track to exceed our industry-leading 2024-26 growth targets and upgrade our 2025 full-year adjusted diluted EPS forecast.

Philip Morris’ work to continue to grow its smoke-free business (SFB) is bearing fruit. Its SFB now accounts for 41% of total net revenues, up 2.9 percentage points from last year’s quarter. In the quarter, the company’s SFB experienced net revenue growth of 17.7% (13.9% organically) with gross profit increasing 19.5% (14.8% organically). We continue to like Philip Morris’ oral SFB, which increased 16.9% in pouch or pouch equivalents (20.2% in cans), fueled by nicotine pouches. In the U.S., for example, its nicotine pouch product line-up ZYN accelerated growth to 39% in the third quarter. Philip Morris recently increased its regular quarterly dividend by 8.9%, to $1.47 per share, or annualized $5.88 per share. Looking to 2025, net revenue is expected to grow 6%-8% on an organic basis and adjusted diluted earnings per share, excluding currency, is targeted in the range of $7.36-$7.46, up from $6.57 in 2024, up 12.8% year-over-year at the midpoint. Shares yield 3.7% at the time of this writing.

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