Higher HTU Sales To Drive Philip Morris’ Q2?

Philip Morris (NYSE: PM) is scheduled to report its Q2 2024 results on Tuesday, July 23. We expect the company to post revenue and earnings marginally below the consensus estimates. We expect the company to garner $9.1 billion in sales and $1.55 in adjusted earnings per share in Q2, compared to the street expectations of $9.2 billion and $1.57, respectively. Philip Morris’ top-line growth will likely be driven by an uptick in heated tobacco units (HTU), while currency fluctuations may weigh on the overall bottom-line growth. Furthermore, our forecast indicates that PM stock is appropriately priced, as discussed below. Our interactive dashboard analysis of Philip Morris Earnings Preview has additional details.

PM stock has shown gains of 25% from levels of $85 in early January 2021 to around $105 now, vs. an increase of about 45% 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, aligning with its current levels. 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 17x figure compares with the stock’s average P/E value over the last three years.

Looking at the previous quarter, Philip Morris’ revenue of $8.8 billion in Q1 was up 10% y-o-y. 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.

Coming to the latest quarter, Philip Morris will likely benefit from continued gains for its IQOS products. 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 the previous quarter. However, the overall cigarette volume may continue to see lower levels, amid a high inflationary environment. That said, a higher pricing for its combustible products likely benefited the overall sales growth.

Looking forward, the company lowered its earnings outlook (post Q1) to be in the range of $6.19 and $6.31 on a per-share and adjusted basis for 2024, compared to its prior guidance of $6.32 to $6.44. This can primarily be attributed to currency fluctuations. Overall, we think that Philip Morris will post a slight miss on Q2 expectations and its stock already trading at 17x forward expected earnings, it doesn’t appear to have room for growth.

While PM stock seems to have some 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 7/21/2024
[2] Cumulative total returns since the end of 2016

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