In this article I would like to discuss IQOS and the potential in Europe. I recently came back from a 12 day trip through Germany, Switzerland, Spain and Morocco… Poor me I know, however as an avid IQOS user I was stunned at the positive reaction of Europeans and the fascination of my IQOS device and Heetsticks.

My thought entering the trip was that Europe was awash in IQOS as the product is marketed in Spain, Germany and Switzerland, however I underestimated the interest and questions it generated when strangers approached me on the streets and cafe’s wanting to know 1) what it was 2) where I got it 3) could they buy it from me.

I was also unbelievably surprised at the amount of tobacco smoking that occurs in Europe. I had not been to the continent in at least 12 years now but I was struck at how many people, in Spain specifically that were smokers and that also were looking for a “non vape“alternative as vapes are viewed as dirty and for kids.

If I had planned this trip accordingly and without embellishing I could have sold at minimum 20 IQOS devices and Heetsticks and likely paid for at least my hotels with the profits. As an unwitting ambassador of Philip Morris (PM) I introduced waiters, waitresses, bartenders, hotel guest and taxi drivers to this device and the response was nearly universal, strong buy!

A few willing candidates wanted to try the device and the response was equally impressive, they all loved the flavor and the ease of use along with no smoke, no ash and reduced smell.

To them and me, it tastes like tobacco and gives them the hit that vapes cannot. Most smokers or former smokers do not enjoy a bubblegum flavored vape device and crave the taste of tobacco, IQOS give it to them.

Image result for philip morris IQOS market share

Source: Philip Morris International | Delivering a Smoke-Free Future

IQOS is growing and growing fast however the market penetration rates of IQOS is still in its infancy due to a deliberate and methodical plan by (PM) to open a few flagship stores in large urban areas and let the word spread slowly and then expand from there.

The bottom line is that there is still a lot of tread on the tires for expansion as the people of Frankfurt, Zurich, Malaga and Gibraltar knew nothing of the product.

This reminds me of how Apple first opened its stores in the USA and internationally and Philip Morris looks to have photo copied the marketing plans of Apple (AAPL) in both its product presentation and store ambiance.

Source: Philip Morris International | Delivering a Smoke-Free Future

Clearly Philip Morris is attempting to make IQOS a fashionable “upscale“product / brand and at $100-$200 per device and $6 per pack of Heets they need too, but they seem to be pulling it off so far as not one person batted an eye at the price of the device or the Heetsticks.

As to the brass tacks of IQOS and its contribution to Philip Morris, IQOS revenue per unit has so far been higher for heated tobacco units as compared to cigarettes. This is because a pack of 20 heated tobacco units is priced similar or slightly higher than a pack of 20 Marlboros, also the taxation issue is still a bit of a mystery in different jurisdictions so IQOS likely is bringing in higher revenue per user that traditional cigarettes currently.

As to profit margin for IQOS, I was able to pull the following from a World Health Organization report on heated tobacco “According to data released by Euromonitor in 2017, total sales for HTPs in 2016 were US $ 2.1 billion and Euromonitor International expects HTP totals to reach US $ 17.9 billion by 2021, according to its 2018 forecast. Profit margins for PMI ‘s iQOS are 30%-50% higher than for conventional cigarettes, leading some analysts to project that iQOS sales will contribute up to 15% of PMI’s profits in 2019.”

If this prediction proves true for Philip Morris, then the future looks to be very profitable for Philip Morris.

Currently the company trades for a very reasonable forward PE of 15 and a hefty 5.4% dividend that looks quite secure given the nature of its business.

ChartData by YCharts

I have held Philip Morris for a little over 2 years and so far it has been a rather poor investment to date as I am roughly even when including the DRIP contributions, however I still believe the future looks bright with the company and this trip and evidence (although anecdotal) did little to change this feeling.

IQOS is now live in the USA and it is obviously far too early to tell the response however the product is solid and barring regulatory interference I predict the company will have success in the USA along with Europe.

Disclosure: I am/we are long PM, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-12-31