Global cigarette and tobacco giant Philip Morris International Inc. (PM) plans to hedge against declining smoking rates and heightened regulatory pressure by moving away from traditional cigarettes and toward a “smokeless” future. At the center of the New York City-based firm’s ambitious growth plan is its branded heat-not-burn tobacco product called iQOS, which is currently under review by the Food and Drug Administration (FDA) to be marketed as a “reduced risk” product.

Analysts led by Bonnie Herzog at Wells Fargo are bullish on the second wave of the Marlboro maker’s new smoke-free iQOS product, seeing room for more upside in PM shares after already gaining nearly 35% year-to-date (YTD). (See also: Philip Morris Doubles Down on Greece for iQOS.)

Analysts Rate PM Outperform

Herzog highlights the “highly successful rollout of iQOS Platform 1 (“HEETS”), suggesting that investor focus will increasingly shift to Platform 2 (“TEEPS”), scheduled for city testing this year. Wells Fargo expects even greater success from Platform 2 compared to the initial launch due to its “broader appeal to smokers,” since the product looks and feels more like a traditional cigarette, as it is lit with a regular match or lighter. The analysts foresee faster consumption uptake and conversion potential from the new rollout, given established consumer awareness of the brand caused by “the halo effect from Platform 1.”

“Once commercialized, we believe Platform 2 has the potential to accelerate PM’s transformational growth as it continues to implement a total portfolio approach toward premiumizing its overall offerings—something we believe the market continues to underappreciate,” wrote Herzog

Analysts say preliminary analysis suggests Platform 2 could “increase PM’s fundamental value by an incremental $22/sh (on top of the $35/sh for Platform 1) of which only 30% is reflected in PM’s current valuation.” (See also: Tobacco Industry Earnings Reverse Winning Streak.)

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