In light of the coronavirus pandemic, we were overweight the consumer staples sector with a focus on big tobacco. Besides precedent for resilience of this sector during economic downturns, tobacco shops were also one of the few amenities still available to the public during lockdowns. Furthermore, shelter-in-place orders were a recipe for relapses into the smoking habit, and in the cases of more staunch smokers, we could expect more frequent smoking. Our view was vindicated later by the Philip Morris (NYSE:PM) Q1 earnings call results which showed substantial resilience.

Despite operational resilience, PMI underperformed the overall market. Currently, the company has not taken part in the recent rally despite the fact that Philip Morris is ready to take a lead in the heated tobacco space globally, with their commercialisation efforts for IQOS now ready to slowly resume with shelter-in-place restrictions coming to an end. Although the market potential for IQOS is being recognized by markets, with it growing in a matter of years to be one of the largest tobacco brands in the world, what the market seems to be failing to realise is that there are multiple margin expansion vectors that will result from an emphasis of IQOS products in the PMI sales mix.

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