Philip Morris International Inc. (NYSE:PM) cut its 2026 adjusted earnings forecast for the third time this year on July 22. Nevertheless, the shares rose about 5% in early trading and closed 3.33% higher at $194.30.

The market appears to have looked through the guidance reduction for two reasons. First, the cut reflected a smaller expected currency benefit rather than weaker underlying operations. Second, an unexpectedly strong cigarette business helped Philip Morris beat revenue and adjusted earnings estimates while giving it more room to invest in its slower-growing U.S. ZYN franchise.

Reuters highlighted the cigarette surprise as the main driver of the beat. Bernstein analysts said they struggled to remember “such a big beat for a cigarette business” in ten years of following the industry.

That creates a more interesting question than the earnings beat itself: Did the rally demonstrate the strength of Philip Morris’ diversified business, or did an unusually good cigarette quarter temporarily distract investors from weakening ZYN economics?

BULL CASE

The bull case is that Philip Morris did not actually reduce its underlying earnings expectations.

The company lowered its reported adjusted diluted EPS forecast to between $8.26 and $8.41 from $8.31 to $8.46 because its estimated currency benefit declined by five cents per share. Excluding currency, its forecast remained unchanged at between $8.11 and $8.26.

Investors therefore treated the revision as foreign-exchange translation rather than a deterioration in the business. The revenue and adjusted EPS beats provided additional evidence that the operational forecast remained achievable.

The biggest source of reassurance came from cigarettes. Volumes increased 1.1% to 156.9 billion units, substantially exceeding the 151.17 billion consensus cited by Bernstein. Philip Morris consequently improved its full-year cigarette-volume outlook to a decline of 2% to 3%, compared with its previous forecast of around 3%.

The significance of that performance goes beyond one quarter of higher cigarette sales. Philip Morris is preparing to spend more on ZYN at a time when competition is increasing, and new manufacturing capacity is pressuring margins. Strong combustible earnings give the company a larger financial cushion to fund that investment without abandoning its full-year growth targets.

The results also showed that Philip Morris’ smoke-free transition does not depend entirely on ZYN. International smoke-free revenue grew 11.8% organically, supported by IQOS and VEEV. The weakness was concentrated in the U.S. rather than spread across the company’s entire smoke-free portfolio.

ZYN itself showed at least a sequential recovery. U.S. shipments increased 1.8% to 2.9 billion pouches after declining more than 23% in the first quarter. Philip Morris also began expanding the brand into higher-strength and additional flavor variants.

The FDA’s June 30 decision granting modified-risk marketing authorization to 20 ZYN products strengthens the brand’s regulatory position. The authorization does not cover the entire portfolio, but it gives Philip Morris a marketing advantage that competitors in the nicotine-pouch category currently lack.

From this perspective, the rally was not simply a reaction to strong quarterly numbers. Investors saw an intact underlying earnings forecast, a resilient source of combustible profit, continued international smoke-free growth, and early signs that the ZYN slowdown may be stabilizing.

BEAR CASE

The bear case is that the quarter’s biggest positive came from the business Philip Morris is supposed to be moving beyond, while the economics of its most important U.S. growth brand continued to weaken.

ZYN shipments returned to modest growth, but management estimated that consumer offtake was only flat to slightly higher year over year even as the broader nicotine-pouch category expanded. That suggests ZYN is no longer capturing category growth as easily as it once did.

Philip Morris has responded by launching ZYN ULTRA, a higher-strength product priced below its flagship range on a per-pouch basis. It is also filling gaps in strengths, moisture levels, and flavors while increasing spending on marketing, distribution, and in-store execution.

Those actions may restore momentum, but they also reveal why the market remains concerned. Philip Morris is having to broaden the portfolio, adjust its pricing architecture, and spend more to defend ZYN against competitors such as British American Tobacco’s Velo.

The pressure is already visible in the U.S. business. Second-quarter revenue declined 0.7%, while adjusted gross profit fell 9%. Adjusted gross margin contracted by six percentage points to 65.4%.

In other words, ZYN’s sequential shipment recovery did not produce a comparable improvement in profitability. The ramp-up of new manufacturing capacity raised costs, while lower-priced variants and additional commercial spending could continue to pressure margins.

The quality of the broader earnings beat also deserves some skepticism. Management said favorable currency effects accounted for approximately one-third of the outperformance against its prior forecast. The remaining upside reflected strong cigarettes and the timing of commercial spending that shifted from the second quarter into the third.

Some of the quarterly upside was therefore deferred expense rather than a permanent increase in earnings power. Philip Morris expects higher second-half U.S. investment, while its third-quarter adjusted EPS forecast of $2.20 to $2.25 was below the $2.42 FactSet consensus cited by Barron’s.

The danger is that investors rewarded Philip Morris for an unusually strong cigarette quarter while placing too little weight on the amount of spending required to revive ZYN. Cigarette volumes still declined during the first half and are expected to fall for the full year. Management also expects combustible pricing to moderate during the second half.

If cigarette momentum fades before ZYN regains share and profitability, the earnings cushion that supported the post-results rally could narrow.

INSIDER MONKEY’S HEDGE FUND DATA ANALYSIS

Insider Monkey’s hedge fund database shows that 78 hedge funds held positions in Philip Morris International Inc. (NYSE:PM) at the end of the first quarter of 2026, compared with 82 funds at the end of the preceding quarter.

These reflect holdings as of March 31, 2026, and do not capture trades made after that date or investors’ reactions to Philip Morris’ second-quarter results, the latest guidance revision, or the FDA’s June 30 ZYN decision.

CONCLUSION

Philip Morris rose because investors viewed the latest guidance reduction as a currency adjustment rather than an operational cut. The unexpectedly strong cigarette business, continued international smoke-free growth, and sequential improvement in ZYN shipments gave the market more important signals than the lower reported EPS range.

The bull case is that Philip Morris’ diversified model is working as intended. Cigarettes are generating the earnings needed to support investment in ZYN while IQOS and other international smoke-free products continue to grow.

The bear case is that the quarter relied heavily on an unusually strong combustible performance while ZYN struggled to match category growth and generated weaker U.S. margins.

If the expanded ZYN lineup, modified-risk authorization, and higher spending restore market-share momentum, the rally will look like a reasonable response to an intact underlying earnings story.

If ZYN remains close to flat while lower pricing and additional investment weigh on margins, the cigarette beat may prove to have temporarily concealed a slower and more expensive U.S. smoke-free transition.

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