After 8% Drop This Year, Pricing Growth To Bolster Philip Morris’ Q3

Philip Morris (NYSE: PM) is scheduled to report its Q3 2023 results on Thursday, October 19. We expect PM stock to trade higher, with its revenue and earnings likely exceeding the street expectations. The company should continue to benefit from an uptick in heated tobacco units and better pricing. Our interactive dashboard analysis of Philip Morris Earnings Preview has additional details.

PM stock has witnessed gains of 10% from levels of $85 in early January 2021 to around $95 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in PM stock has been far from consistent. Returns for the stock were 15% in 2021, 7% in 2022, and -8% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that PM underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? Our forecast indicates that PM stock has ample room for growth, as discussed below.

(1) Pricing gains to bolster top-line growth

• Trefis estimates Philip Morris’ Q3 2023 revenues to be around $9.3 billion, reflecting a 16% y-o-y rise and slightly above the $9.2 billion consensus estimate.
• Philip Morris sells its tobacco products in non-U.S. markets. Revenue is generated from the sale of cigarettes and its flagship smokeless tobacco offering – IQOS. It acquired Swedish Match, Scandinavia’s largest snus (a moist smokeless tobacco product) manufacturer, in Q4 last year, and it will aid the overall top-line growth.
• The company is expected to see continued growth in heated tobacco units, a trend seen in the recent past.
• Looking at Q2 2023, the company reported net revenue of $9.0 billion, marking a 14.5% rise over the prior-year quarter.
• The sales growth was driven by a 27% rise in heated tobacco units shipment volume and a 9% rise in combustible tobacco pricing. However, cigarette volume was down 0.4%.
• Our dashboard on Philip Morris Revenues has more details on the company’s segments.

(2) EPS likely to be slightly above the consensus estimates

• Philip Morris’ Q3 2023 adjusted earnings per share (EPS) is expected to be $1.65 per Trefis analysis, slightly above the consensus estimate of $1.61.
• The company’s adjusted EPS of $1.60 in Q2 2023 was up 17% from $1.48 in the prior-year quarter.
• The company’s adjusted operating margin contracted 180 bps during the quarter due to higher inflationary pressure on SG&A. Our Philip Morris Operating Income Comparison dashboard has more details.
• For the full-year 2023, we expect the adjusted EPS to be higher at $6.23 compared to $5.98 in 2022.

(3) PM stock looks like it has ample room for growth

• We estimate Philip Morris’ Valuation to be around $112 per share, 20% above the current market price of $93.
• This represents an 18x P/E multiple based on a forward EPS estimate of $6.23, compared to the last three-year average of 15x. Given the expected strong growth in the heated tobacco business and from the integration with Swedish Match, we have assigned a slightly higher multiple than the historical average.
• If the company reports upbeat Q3 results and provides a 2023 outlook better than the street estimates, the P/E multiple will likely be revised upward, resulting in higher levels for PM stock.

While PM stock seems to have ample room for growth, it is helpful to see how Philip Morris’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 10/18/2023
[2] Cumulative total returns since the end of 2016

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