BTAFF - Philip Morris International: A Hidden Gem For Conservative Investors

2023-09-26 07:45:48 ET

Summary

• Philip Morris International is one of the largest tobacco companies headquartered in Stamford, with well-known cigarette brands such as Marlboro, L&M, and Bond Street in its portfolio.
• The Company's ' revenue for the three months ended June 30, 2023, amounted to $8.97 billion, 11.8% more than the previous quarter and 14.6% more than the second quarter of 2022.
• PM acquired Swedish Match in 2022 to diversify its business and reduce its financial dependence on cigarette sales.
• Although Philip Morris' total debt/EBITDA ratio exceeds 3x, we do not expect the company to have significant difficulty repaying senior notes maturing between 2024 and 2044, thanks to the successful launch of IQOS in new markets and a disciplined capital allocation policy led by Jacek Olczak.
• We initiate our coverage of Philip Morris with an "outperform" rating for the next 12 months.

Philip Morris International (PM) is one of the largest tobacco companies headquartered in Stamford, with well-known cigarette brands such as Marlboro, L&M, and Bond Street in its portfolio. In recent years, the company has continued to aggressively transform itself by developing and commercializing smoke-free products, led by IQOS and ZYN, to create a smoke-free future. This strategy has already begun to bear fruit, not only in the continued increase in the company's revenue year over year but also in progressively addressing the essential public health issues associated with smoking.

Despite the ongoing euphoria in financial markets due to the AI boom, Philip Morris is a consumer-sector defensive stock whose share price is less sensitive to geopolitical tensions and economic downturns because its products are often addictive to tens of millions of people. Furthermore, the company has followed a policy of increasing dividend payments yearly for fourteen years. This particular approach is one of the key investment thesis that is helping to attract the interest of conservative investors.

Despite the strict regulation of the tobacco industry, changes in legislation in this area are rare. This creates conditions in which the share of Philip Morris' five largest shareholders remains stable for a long time. Wall Street giants such as Vanguard Group, Capital World Investors, Capital International Investors, Blackrock, and State Street are among them.

We are approaching the publication of the third quarter 2023 financial report, which we estimate will please investors, as well as the financial results for the three months ended June 30, 2023. The second quarter of 2023 not only exceeded analysts' expectations but also confirmed that demand for Philip Morris products remains stable despite the slow recovery of the Chinese economy and a sharp increase in US household debt.

Even so, the company's share price has gained about 2.8% over the past six months, outperforming such major competitors in the consumer staples sector as Altria Group ( MO ), British American Tobacco ( BTI ), and Imperial Brands ( OTCQX:IMBBY ).

We initiate our coverage of Philip Morris with an "outperform" rating for the next 12 months.

Philip Morris' Q2 2023 financial results and outlook for the second half of 2023

Philip Morris' revenue for the three months ended June 30, 2023, amounted to $8.97 billion, 11.8% more than the previous quarter and 14.6% more than the second quarter of 2022. However, Philip Morris' actual revenue beat analysts' consensus estimates in eight of the last ten quarters, indicating that Wall Street is underestimating the growth prospects of one of the largest tobacco corporations in the world.

Simultaneously, the ongoing decline in cigarette supply volumes persists, driven in part by reduced smoking rates in numerous developed countries and a growing preference among individuals for electronic cigarettes.

According to Seeking Alpha , Philip Morris' revenue for the third quarter of 2023 is expected to be $8.96-$9.72 billion, 7.1% more than analysts' expectations for the previous quarter. At the same time, under our model, the company's total revenue will be slightly higher than the median value of this range and will amount to $9.4 billion. This will mainly be due to continued strong growth in demand for numerous IQOS devices in the European Union and Japan, which partially offsets the decline in supplies of Marlboro cigarettes in Asia.

Another key contributor to the company's revenue growth will be Swedish Match's oral products. Philip Morris acquired Swedish Match in 2022 to diversify its business and reduce its financial dependence on cigarette sales. So, the shipment volume for nicotine pouches amounted to 99.5 million cans in the second quarter of 2023, which is 22.5% more than the first quarter of 2023 and significantly higher than the previous year.

Philip Morris' Q2 2023 operating income margin was 29.7%, down significantly year-over-year and still below its average of 38.81% between January 1, 2021, and the end of June 2023. We forecast that this financial metric will reach 34.2% by 2023, and by 2024, it will increase to 36.4% due to raised prices for tobacco products and lower costs of raw materials for producing cigarettes and e-vapor products.

According to Seeking Alpha , Philip Morris' Q3 EPS is expected to be $1.56-$1.68, up 9.5% from the Q2 2023 consensus estimate. At the same time, according to our model, Philip Morris' EPS will be $1.62, which is 6% more than the previous year.

On the other hand, the company's Non-GAAP P/E [TTM] is 16.09x, which is 11.63% lower than the average for the sector and 0.12% higher than the average over the past five years. Moreover, the Non-GAAP P/E [FWD] is 15.24x, which is one of the factors indicating a slight undervaluation of the company during a growing macroeconomic uncertainty caused, among other things, by the soaring global public debt.

At the end of the second quarter of 2023, Philip Morris' total debt was approximately $47.97 billion, an increase of 69.3% over 2021 due to the need to finance the acquisition of Swedish Match. As a result of the company's continued downward trend in EBITDA in recent quarters, the total debt/EBITDA ratio rose from 2.01x to one of the highest values for Philip Morris, reaching 3.54x.

Although Philip Morris' total debt/EBITDA ratio exceeds 3x, we do not expect the company to have significant difficulty repaying senior notes maturing between 2024 and 2044, thanks to the successful launch of IQOS in new markets and a disciplined capital allocation policy led by Jacek Olczak.

Conclusion

Philip Morris International is one of the largest tobacco companies headquartered in Stamford, with well-known cigarette brands such as Marlboro, L&M, and Bond Street in its portfolio.

The growth in sales of heated tobacco products, the increase in prices for Philip Morris cigarettes, and the launch of new devices not only contribute to the company's revenue growth from quarter to quarter but also indicates the willingness of consumers to buy tobacco products despite the growing household debt. In addition, the company's management adheres to a policy of increasing dividend payments from year to year, and currently, its dividend yield exceeds 5%. As a result, these key factors attract conservative investors to buy Philip Morris shares and reinvest their dividends over the decades.

We initiate our coverage of Philip Morris with an "outperform" rating for the next 12 months.

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