Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Philip Morris has a few more breaths yet. 

The international cigarette maker reported second-quarter shipments that fell short of Wall Street's expectations, sending shares down about 4 percent in Tuesday trading. 

Take A Pass
Philip Morris' stock dropped by 4% after posting lower-than-expected second-quarter earnings results
Source: Bloomberg
Intraday times are displayed in ET.

But investors shouldn't count out Philip Morris just yet. The company's ability to boost revenues through price hikes shows the strong hold it still has on customers. New smoking technology could help it gain more market share, while giving it even more pricing power. Philip Morris, which was spun off from Altria in 2008 and operates exclusively outside of the U.S., still commands more of the international market than many of its peers -- including the only markets where smoking rates are rising.

Take a Puff
The global smoking rate slowed its decline last year, helped by smokers in the Middle East, Africa and Asia
Source: Bloomberg, Euromonitor

The company's cigarette shipment volume fell by 4.8 percent in the quarter from the year before. But net revenues, excluding unfavorable currency impacts and excise taxes, grew by 1.4 percent, on the back of price hikes in Asia and Europe. Philip Morris said it expects prices across the board, excluding excise taxes, to be up about 6 percent from 2015. Hikes are planned in key markets such as Canada, Italy, and Russia. 

Pay Up to Light Up
Philip Morris can use price increases to help offset falling cigarette shipments

The world won't suddenly forget that smoking cigarettes kills people, ushering in a wave of growth. But cigarettes are among the most inelastic of goods: Regardless of how much prices or taxes increase, people who still want to smoke are going to buy them. Philip Morris may not be a stock you put in your child's education fund for years to come -- some day all cigarette-makers will have to wind down operations. But Philip Morris has some good years left in it. 

Philip Morris also said Tuesday that its new iQOS heat sticks, which heat tobacco instead of burning it, are boosting growth in the countries offering the product. It hopes the new, high-priced products will help it take market share from competitors and offset declining volumes in its traditional cigarette business. 

The company said its market share in Japan, for instance, rose to 2.7 percent in June, up from 1.6 percent in mid-April, when it rolled out iQOS nationwide. It currently sells iQOS products in 10 markets, including Portugal, Italy, Russia and Switzerland, and said it's on track to launch iQOS in around 20 markets by the end of 2016. The technology behind the heat sticks helped inspire analyst upgrades of the stock in recent months. Wells Fargo analyst Bonnie Herzog, for example, estimated the new business could be worth another $27 a share on top of the company's then-share price of $96. It's now trading at $99. 

Sure, Philip Morris' 21 percent total return this year doesn't look as hot as that of other tobacco giants such as Altria Group and Reynolds American, which have returned 34 percent and 36 percent, respectively. But it beats the 4 percent total return of the S&P 500 in the past year. And all three stocks are pretty expensive: Philip Morris trades at 21 times forward earnings, about 8 percent above its five-year average and on par with Altria and Reynolds. 

As long as Philip Morris keeps raising prices and taking market share, its cash influx will continue. And that, in turn, will be sent to shareholders in the form of a hefty dividend (Philip Morris yields about 4 percent) that keeps many investors in the stock. Philip Morris hasn't been stubbed out yet. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at

To contact the editor responsible for this story:
Mark Gongloff at