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Philip Morris Stock Stands to Get a Boost From Earnings

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Philip Morris' IQOS smokeless tobacco product.

Fabrice Coffrini/AFP/Getty Images

Philip Morris International stock hasn’t had a hot start to 2024, but its shares could be ready to bounce back when it reports fourth-quarter earnings on Feb. 8.

Since the start of the year, Philip Morris shares have fallen 1.1%, lagging behind the Consumer Staples Select Sector SPDR exchange-traded fund’s 3.1% rise. There are good reasons: The Red Sea attacks by Houthi rebels have raised concerns about shipments and costs, while a stronger dollar could weigh on its sales, which come primarily from outside the U.S.

Now the stock is stabilizing in the low $90’s, where it has found support many times in the past couple of years, and earnings could be the catalyst the shares need to head higher. Sales for the quarter are expected to grow 10.5% to $9 billion, according to FactSet. The increased adoption of the company’s smokeless products, including its iQOS heated tobacco, should offset declines in traditional cigarette sales.

iQOS, in particular, is doing well. Smokeless tobacco products are growing at an annual clip of just under 5% globally and could hit $124 billion by 2029, according to Mordor Intelligence. IQOS shipments, though, grew at an 18% clip in the third quarter, and, because they cost more, translate into higher sales when smokers make the switch.

That should help boost profitability this quarter. Gross margins should rise several percentage points from last year’s fourth quarter, as the higher-margin IQOS effort becomes a larger part of the business. While earnings per share are expected at only $1.45, up just 4%, it’s higher interest expenses and tax rates that will hold the bottom line back. Those expenses should stabilize over the coming years, making double-digit annual profit growth a reasonable expectation in the near future.

And even fourth-quarter earnings could come in higher than Wall Street expects, while guidance could surprise to the upside thanks to the company’s rollout of Iluma tobacco-heating products in the U.S. “[We] see a potential upside surprise to both top & bottom line results and expect management to introduce...attractive 2024 growth guidance,” writes Goldman Sachs analyst Bonnie Herzog, who has a Buy rating on the stock. “We ultimately believe [guidance] could prove conservative depending on the pace/trajectory of ILUMA’s global rollout as well as the May launch of iQOS in the US.”

Moreover, Philip Morris stock looks cheap. It trades at just 14 times 12-month forward earnings, a 30% discount to its five-year average and only slightly higher than where it has typically found a bottom during that period.

If earnings deliver, Philip Morris stock should be smoking.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com