IQOS Helps Philip Morris Navigate Well In Q1

Philip Morris (NYSE: PM) recently reported its Q1 results, with revenues and earnings above the street estimates. The company reported revenue of $8.8 billion and adjusted earnings of $1.50 per share, compared to the consensus estimates of $8.5 billion and $1.41, respectively. The revenue growth was driven by robust demand for its heated-tobacco business. Although the company reported an upbeat Q1, we think its stock has little room for growth. In this note, we discuss Philip Morris’ stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at its stock performance in recent years. PM stock has witnessed gains of 20% from levels of $85 in early January 2021 to around $100 now, vs. an increase of about 35% for the S&P 500 over this roughly three-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 -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — 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? From a valuation perspective, PM stock looks like it has little room for growth. We estimate Philip Morris’ Valuation to be $107 per share, reflecting less than 10% upside from its current levels of around $100. Our forecast is based on a 17x P/E multiple for PM and expected earnings of $6.27 on a per-share and adjusted basis for the full year 2024. The 16x figure compares with the stock’s 17x average P/E value over the last three years.

Philip Morris’ revenue of $8.8 billion in Q1 was up 10% y-o-y. Heated Tobacco Unit (HTU) shipment volume was up a solid 21%, oral products volume was up 36%, which more than offset a 0.4% decline in cigarettes volume. Total consolidated volume was up 3.6% in Q1. The company saw its adjusted operating margin expand by 90 bps y-o-y to 38.2%. The bottom line of $1.50 on a per-share and adjusted basis in Q1’24 reflected a 9% y-o-y rise. Looking forward, the company has lowered its earnings outlook to now be in the range of $6.19 and $6.31 on a per-share and adjusted basis in 2024, compared to its prior guidance of $6.32 to $6.44. This can primarily be attributed to currency fluctuations.

Overall, Philip Morris navigated well in Q1, and it has some positives to look forward to. Firstly, the company expects its HTU volume to rise in the mid-teens percentage this year. Also, its electronic cigarette — IQOS — has been growing strongly and has surpassed the Marlboro brand in terms of revenue. In fact, a strong global demand for IQOS helped the company offset the impact of a ban on flavored heated tobacco products in the European Union in Q1. However, much of the positives appear to be priced in for PM stock, in our view. PM stock is already trading at 16x forward earnings, aligning with its average P/E multiple over the last three years.

While PM stock looks like it has little 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] Returns as of 4/25/2024
[2] Cumulative total returns since the end of 2016

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