Is Philip Morris International Stock a Buy?

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Philip Morris Internationalit is (PM 2.50%) the stock price rose 4% on July 21 after the tobacco giant released its second-quarter earnings report. Its revenue rose 3% year-over-year to $7.83 billion, beating analyst estimates of $1.07 billion. On a pro forma adjusted basis, which excludes Russia and Ukraine from both periods, its revenue increased by 6%.

Philip Morris International (PMI) adjusted earnings fell 6% to $1.48 per share, primarily due to a $0.16 per share impact from currency headwinds, but still topped expectations. analysts’ expectations of $0.23. On a pro forma basis in constant currencies, its adjusted earnings would have increased by 6%.

Image source: Getty Images.

Those numbers were a bit confusing, but PMI’s core business still looks pretty stable. Should investors buy it as a safe haven in this bear market?

Understand the business of PMI

PMI was derived from Altria (MO 0.75%) in 2008. After this separation, PMI only operated in overseas markets, while Altria remained in the United States. it was also exposed to unpredictable currency headwinds and changing regulations.

Like Altria, PMI is raising prices and cutting costs to compensate for falling smoking rates. PMI also resumed buybacks last year to extract higher earnings per share from its slower revenue growth.

To diversify its business beyond its flagship Marlboro brand and other traditional cigarettes, PMI launched its IQOS heated tobacco devices in 2014. These electronic devices heat tobacco sticks instead of burning them, and it promotes them as alternatives to cigarettes and e-cigarettes.

PMI now relies on IQOS for most of its growth. As this chart illustrates, growth in PMI’s heated tobacco business has consistently offset its slow shipments of traditional cigarettes over the past few years.

Period

2019

2020

2021

1H 2022

Growth in cigarette deliveries*

(4.5%)

(7.9%)

(0.6%)

1.4%

Growth in heated tobacco deliveries

44.2%

27.6%

24.8%

19.7%**

Growth in total shipments (cigarettes and heated tobacco)

(2%)

(8.1%)

2.2%

4%**

Organic revenue growth*

6.4%

(1.6%)

7.6%

8.1%**

Data source: PMI. *On a comparable basis. **Pro forma adjusted basis.

For the full year, PMI expects its heated tobacco shipments to increase by 22% to 25% and its total shipments to increase by 1.5% to 2.5%. It also expects its adjusted revenue to improve 6% to 8% organically. All of these estimates were made on a pro forma basis.

Inflationary headwinds and maximum margins

PMI’s price increases, cost-cutting measures and continued expansion of its IQOS business have helped it boost its operating margins through 2021. But this year, its operating margins have been squeezed. by inflation, supply chain disruptions and rising IQOS component prices. It also continues to increase its investments in the development and marketing of new heated tobacco products.

Period

2019

2020

2021

1H 2022

Adjusted operating margin

39.5%

40.8%

42.6%

42.4%

Adjusted EPS growth*

9.9%

seven%

15.3%

10.4%

Data source: PMI. * Constant currency, organic basis.

On a pro forma constant currency basis, PMI expects its adjusted EPS to rise 10% to 12% for the full year. But if we include Russia and Ukraine, it expects its adjusted EPS to fall 3-6%.

A low valuation and a high dividend

PMI faces near-term macro headwinds, but its stock still looks pretty cheap at 16 times forward earnings, and it pays a hefty 5.5% forward dividend yield. He’s also increased that payout every year since parting ways with Altria.

Altria trades at just nine times forward earnings and pays a much higher forward yield of 8.5%, but faces tougher challenges in the US as Juul’s e-cigarettes are banned in the US. national scale.

PMI stock won’t take off anytime soon, but its predictable growth, high dividend and low valuation could make it a strong consumer staples stock to hold in the face of an economic downturn.

Leo Sun has no position in the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

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