The tobacco space hasn't been viewed as a place to find growth stocks in a very long time. However, Philip Morris International (NYSE: PM) may be changing that narrative as its smoke-free business continues to drive tremendous momentum for the company. The stock recently hit an all-time high on the back of yet another strong quarter and is up over 40% year to date.
Let's dig into the tobacco company's third-quarter results to see if the stock's rise can continue.
Zyn powers results
Zyn continues to be the biggest driver of Philip Morris's growth with volumes rising 43.6% year over year to 164.6 million cans during the quarter.
If you're unfamiliar with Zyn, it's a nicotine pouch made with nicotine powder and flavoring instead of tobacco. Philip Morris acquired the brand at the end of 2022 when it bought Swedish Match in what has turned out to be a game-changing acquisition.
Meanwhile, Philip Morris also continues to see strong sales of heated tobacco units (HTUs), including its IQOS system. HTU volumes rose 8.9% to 35.3 billion units in the quarter. Excluding the net impact of estimated distributor and wholesaler inventory movements, volumes were up 14.8%. These gains were driven by Japan and Europe.
Traditional cigarette volumes also rose, increasing 1.3% to 163.2 billion units. Its market share ticked down slightly to 24.2%
Overall, organic revenue, which excludes currency impacts, acquisitions, and dispositions, rose 11.6% year over year to $9.9 billion. Adjusted earnings per share (EPS) climbed 18.0% (in constant currency).
On an organic basis, combustible tobacco revenue grew 8.6%, driven by a high-single-digit increase in pricing and resilient volumes. The smoke-free business saw organic revenue climb 16.8%.
In addition to being strong growth drivers, both Zyn and IQOS also come with higher gross margins, which helped the company see an 80-basis-point increase in organic gross margins. Smoke-free gross margins climbed 200 basis points, while combustible organic gross margins increased 10 basis points. Management noted that smoke-free gross margins were more than 450 basis points higher than combustible gross margins in the quarter.
Image source: Getty Images.
The strong momentum led management to raise its full-year 2024 outlook yet again.
Original Guidance
Prior Guidance
New Guidance
Organic revenue growth
6.5% to 8.0%
7.5% to 9.0%
9.5%
Adjusted EPS
$5.90 to $6.02
$6.33 to $6.45
$6.45 to $6.51
Adjusted EPS growth excl. currency
7% to 9%
11% to 13%
14% to 15%
Volume growth
0% to 1%
1% to 2%
2% to 3%
Data source: Philip Morris International.
It expects to generate about $11 billion in operating cash flow while spending $1.4 billion on capital expenditures. Much of the latter is going to increased capacity in the U.S. for Zyn.
The company also increased its quarterly dividend 3.8% to $1.35. That results in a forward dividend yield of 4.1% as of this writing, and it's well covered by the company's cash flow.
Is it too late to buy Philip Morris stock?
While tobacco companies have long talked about sowing the seeds to move their businesses away from traditional cigarettes, Philip Morris is already well into its harvest as its smoke-free products drive significant revenue and earnings growth for the company. Meanwhile, cigarette volumes have held steady, despite price increases, further contributing to the streak of earnings beats and raised guidance this year.
Philip Morris is still building out its Zyn production capacity in the U.S., and it has an opportunity to expand its reach into other countries. IQOS only just landed in the U.S. with an initial launch in Austin, but the company is looking to get its latest version of the product approved by the FDA next year, which could provide another tailwind in 2026.
The stock trades at a forward price-to-earnings (P/E) ratio of 18 based on the analyst consensus for 2025. Even its PEG (price/earnings-to-growth ratio) ratio of 0.7 puts it in what's commonly considered undervalued territory.
PM PE Ratio (Forward 1y) Chart
Despite the recent gains, it's not too late to buy the stock. Philip Morris is a rare example of a large-cap growth stock in a defensive industry. While its valuation has risen given the stock's strong performance this year, it's still very attractive, especially when factoring in the generous dividend.
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Geoffrey Seiler has positions in Philip Morris International. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
