What’s Behind The 70% Rise In Philip Morris Stock?

Philip Morris stock (NYSE: PM) has seen solid gains of over 70% from levels of around $70 in early January 2021 to over $120 now, vs. an increase of about 50% for the S&P 500 over this period. This can primarily be attributed to a 40% rise in the company’s P/S ratio to 5.2x now, versus 3.7x in 2020. Investors have rewarded PM stock given the strong uptick for its heated tobacco product – IQOS.

However, the increase in PM stock has been far from consistent. Returns for the stock were 21% in 2021, 12% in 2022, and -2% 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 IPAR, PG, and KO, 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? We think PM stock is fully priced now. We estimate Philip Morris’ Valuation to be $110 per share, reflecting a 10% downside from its current levels of around $120. At its current levels, PM stock is trading at 19x forward expected earnings of $6.39 in 2024. The 19x figure is higher than the stock’s average P/E ratio of 16x seen over the last three years. Even if we were to look at the P/S ratio, PM stock trades at 5.2x revenues, versus the stock’s average P/S ratio of 4.2x seen over the last three years. Our Philip Morris Valuation Ratios Comparison dashboard has more details. While a slight rise in valuation multiple seems justified given the expansion of its heated tobacco products, we think PM stock is now fully valued.

Philip Morris’ revenue rose 40% from $28.7 billion in 2020 to $36.4 billion in the last twelve months. The company sells its tobacco products in non-U.S. markets. Revenue is generated from the sale of cigarettes and its flagship smokeless tobacco offering – IQOS. In late 2022, Philip Morris acquired over a 90% stake in Swedish Match AB in a $16 billion deal, which has strengthened its position in smokeless products. Swedish Match accounted for $2.5 billion, or 7% of the company’s total sales last year. IQOS has also been growing strongly and leading the growth in Philip Morris’ top line. In fact, it has surpassed the Marlboro brand in terms of revenue.

Looking at segments, South & Southeast Asia, Commonwealth of Independent States, Middle East and Africa Region (SSEA, CIS & MEA) segment saw a large 64% rise in sales over the last three years. Europe sales were up 27% and Americas up 14%. This was partly offset by a 37% decline in East Asia, Australia, and PMI Duty-Free Region (EA, AU & PMI DF), primarily due to lower demand in Australia. Our dashboard on Philip Morris Revenue: How Does PM Make Money has more details.

Philip Morris’ revenue growth has been driven by pricing gains, while total cigarette and heated tobacco units volume was up 5% in the last three years. Still, the company has seen its operating margin contract to 34.8% in the last twelve months, compared to 40.3% in 2020, amid higher costs.

Overall, Philip Morris is on a path to deliver steady sales growth in the coming years. IQOS is now the top-selling brand for the company, and it will likely continue to lead sales growth. However, most of these positives are likely priced in. We think investors will be better off waiting for a dip to pick PM stock for robust gains in the long run.

While PM stock looks fully valued, 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 8/29/2024
[2] Cumulative total returns since the end of 2016

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