Philip Morris's Latest Earnings Call Is Boosting the Stock, but Do Tobacco Products Have Long-Term Staying Power?

Shares of international tobacco giant Philip Morris (NYSE: PM) are up after the company's latest earnings report. The stock's price momentum could soon carry shares to their highest levels since 2017. Though the company still makes most of its profits from cigarettes, global smoking rates are steadily declining.

The company's second-quarter earnings call shed some light on what's happening inside the business and could help investors determine whether the stock's recent success is sustainable or bound to go up in smoke.

Here's what you need to know.

What about Q2 earnings is boosting the stock?

The company delivered top and bottom-line results that surpassed analysts' estimates. Philip Morris reported $1.59 per share in non-GAAP (adjusted) earnings, beating estimates by three cents. The company's $9.47 billion in Q2 sales exceeded expectations by $280 million.

Cigarette results were robust this quarter. Volumes were up 0.4% year over year, but gross profit increased 5.5% due to improving margins and price increases. Combustible cigarettes contributed $3.8 billion of the company's $6.1 billion total gross profit in Q2, so cigarettes are still the core business.

Shareholders should be familiar with the company's transition to smoke-free products, including IQOS heated tobacco, Zyn nicotine pouches, and VEEV electronic cigarettes. Management discussed numerous positive updates during the earnings call, including:

• IQOS heat stick unit shipments increased 13.1% year over year.
• Zyn shipments grew over 50% in the U.S. despite inventory problems.
• VEEV has gained top market share in five European markets.
• IQOS will launch in its first U.S. city in Q4.

Collectively, organic (currency neutral) revenue from smoke-free products grew 18.3% year over year in Q2.

Finally, management raised its earnings expectations for full-year 2024 from a range of $5.70 to $5.82 per share to $5.89 to $6.01.

Overall, the company's core business remained steady, strategic products are growing, and management expects higher earnings than before. That certainly explains the market's bullish response to the report.

Combustible tobacco is in a long-term downtrend

While the cigarette business performed well in Q2, combustible tobacco probably doesn't have long-term staying power.

Smoking rates are declining worldwide, from about 33% in 2000 to 20% today. The global population has grown by roughly two billion people during that time, but cigarette shipments are still trending down. Philip Morris generated $6.7 billion in net revenue on shipments totaling 190.7 billion sticks in Q2 2018. That compares to just 157.6 billion sticks in Q2 2024 for $5.9 billion in net revenue.

In other words, even tobacco's infamous pricing power can't wholly offset lost cigarette volumes. The core tobacco business won't dry up right away, but it's undeniable cigarettes aren't the future, either.

Why the stock is a buy anyway

But as touched on during the Q2 recap, Philip Morris is well aware of this and has been working to grow non-cigarette products since launching IQOS in 2014. Smoke-free products generated 37.8% of companywide sales in Q2, and a nearly 20% organic growth rate will keep pushing that higher over time.

Philip Morris has also emphasized converting smokers to IQOS. If you combine cigarette volumes with IQOS heat sticks (HTU), their combined volume has only fallen 4.2% since Q2 of 2018. Management noted that smoke-free products carry higher profit margins than cigarettes too, making the company more profitable as customers switch from combustible products.

Shareholders are looking at a stock that trades at a reasonable 18.7 times management's 2024 earnings outlook. The company's dividend yields almost 5% today, and management has raised the dividend annually since Philip Morris spun off from Altria in 2008.

No, cigarettes aren't the future, but Philip Morris's future remains bright thanks to the success of its next-generation products that could ultimately prove even more lucrative than traditional tobacco. Those looking for a long-term mix of steady growth and generous dividends should consider buying and holding the stock.

Justin Pope has positions in Philip Morris International. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy .