Record Earnings: Should Investors Buy Philip Morris Stock Now?

Ethan Feller

Tue, Oct 22, 2024, 11:01 AM 5 min read

Philip Morris International (PM) has quietly been one of the best performing stocks in the market over the last three months. This strong outperformance comes after several years of sideways action in the stock as tobacco stocks fell out of favor for institutional investors. But with the proliferation of smokeless products like vapes and most notably Zyn, Philip Morris as well as other incumbent tobacco stocks have again become winning stocks.

The success of this pivot towards smokeless products was further reaffirmed Tuesday morning, as Philip Morris International posted record quarterly earnings. Sales beat estimates by 2.3% and increased 8.4% year-on-year (YoY) to $9.9 billion. Earnings came in 4.9% above estimates and climbed 14.4% YoY to $1.91 per share.

Following the strong results PM stock is up 8% as of midday trading and making new all-time highs. But this is not yet a stock that is running away and is still attractive at current levels. Philip Morris International still enjoys a reasonable valuation, strong growth catalysts, a hefty dividend yield and a Zacks Rank #2 (Buy) rating.

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Proliferation of Smokeless at PM

The significance of Philip Morris and other tobacco giants shifting their business focus from combustible products to smokeless alternatives is hard to understate. As you will see from the performance chart in the next section, these stocks have struggled over the last ten years, with their large dividends being their primary allure.

But with the advent of non-combustible products, not only are sales and profits growing again, but the stocks are now tenable investments for Wall Street’s biggest investors again. Furthermore, the popularity of these products is truly astounding.

Philip Morris shipped 149 million cans of Zyn, their breakout nicotine pouch product, in the most recent quarter, which was a 41% increase from the year earlier. And from the report “The smoke-free business accounted for 38% of our total net revenues and 40% of gross profit (up by 1.9pp and 2.2pp respectively, versus third-quarter last year), and continues to deliver superior performance, with net revenues increasing by 14.2% (16.8% organically) and gross profit increasing by 15.9% (20.2% organically). As a result of our strong year-to-date delivery, we are raising our full-year growth outlook for adjusted diluted EPS to a range of 14% to 15%, excluding currency."

Philip Morris Vs. Altria and BTI Stocks

Among the tobacco giants, I think Philip Morris remains the most attractive of the group. Although it boasts the richest relative valuation compared to British American Tobacco (BTI) and Altria Group (MO), it also seems to have best adapted its business to the current environment. Zyn in particular has truly been a phenomenon over the last few years and just from my subjective experience, I am seeing it everywhere.

We can also see in the stock price movements that investors are favoring Philip Morris stock over British American Tobacco and Altria Group. The stocks have languished over the last decade, but PM has been the clear outperformer. Philip Morris is also the only one of the three that is now trading at new highs, while British American Tobacco and Altria Group still trade well below their 2017 highs.

Although I think with the new products coming the market all of these stocks will enjoy and investing renaissance, I expect Philip Morris Internation to be the relative leader.

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Philip Morris Valuation and Dividends

Currently, Philip Morris International is trading at a one year forward earnings multiple of 18.5x, which is above its 10-year median of 16.5x and below the broad market average. Although it is below its 10-year median, it seems that the industry is going to be entering a new regime. With the prior decade marked by severe underperformance and investor avoidance, the next decade will be very different. Thus, the valuation still appears reasonable to me.

Over the last decade, although the last decade was very poor for stock price appreciation the dividend yield was a notable perk of owning the stock. But even now with profits and popularity on the rise, management is still raising the dividend payment. At Tuesday's quarterly earnings report, management announced another 3.8% increase to the dividend, which now stands at 4.5%.

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Should Investors Buy PM Shares?

Philip Morris International's strong quarterly results and continued shift toward smokeless products present a compelling case for investors. The company's focus on high-growth segments like Zyn nicotine pouches and other non-combustible products has not only bolstered revenue and profit growth but also repositioned the stock as a favorable investment for institutions. With smokeless alternatives now accounting for a significant portion of sales and gross profits, the company appears well-poised for future growth.

Moreover, the company's valuation, while slightly above its historical average, remains reasonable when considering the anticipated growth trajectory and the broader industry shift toward smoke-free products. The 4.5% dividend yield provides additional appeal, offering both income and growth potential. Given these factors, along with Philip Morris's ability to outperform peers like Altria and British American Tobacco, the stock stands out as an attractive choice for investors seeking a combination of stability, growth, and income in the tobacco sector.

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Altria Group, Inc. (MO) : Free Stock Analysis Report

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