Can IQOS Fire Philip Morris’ Stock To $100?

Philip Morris International (NYSE: PM) has increased its earnings guidance for the full year 2019, after the company reported a strong Q2 2019, which was marked with higher earnings despite some pressure on volumes. Philip Morris Revenues have seen a shift in its mix, with heated tobacco’s contribution continuously rising over recent quarters. This trend has also kept the stock price very active in the last one year.

You can view the Trefis interactive dashboard – Importance of Heated Products To Philip Morris’ Stock – and alter the key assumptions to arrive at your own estimate of the company’s revenue, earnings, and stock price. In addition, here is more Consumer Staples data.

Stock Price Trend

• Philip Morris saw its stock price decline sharply in December 2018, led by the FDA’s adverse and probable crackdown against what it called the rising “menace” of e-vapor consumption among teenagers and young adults.
• However, the company’s stock increased from $67 per share to $89 per share in the last seven months, thus clocking a year-to-date increase of 33%.
• The surge in stock price was primarily driven by the rising demand for heated tobacco due to a shift in consumer preferences, along with a strong shareholder return program of the company.
• Additionally, the recent FDA approval received for marketing and sale of IQOS (PM’s flagship heated tobacco product) in the US has further boosted the stock.

IQOS

• IQOS is a flagship product of Philip Morris, which heats and not burns tobacco, while it is being used by a consumer.
• The FDA has given its approval to PM, for the marketing and sale of this product in the US.
• This decision, which comes after almost 2 years of the company trying to get the approval, is a shot in the arm for the company, which can now expand in, and reap benefits from, a large US market.
• The fact that in just two years, 7.3 million people around the world have switched to IQOS indicates the immense potential for the company to grow even in the US.
• A successful launch in the region could add close to $2 billion in segment (reduced-risk products) revenues for the company over the next 3 years.

Revenue Trend

Reduced-Risk Products

• Shipments of heated products are expected to continue its increasing trend, due to growing demand for non-combustible options, along with the ongoing discounts and promotional offers.
• Additionally, Philip Morris’ rising market share for its heated product segment in the EU region, Japan, and Russia could drive its segment revenue growth in the medium-term.
• The FDA’s approval for marketing and sale of IQOS in the US is likely to boost segment revenues as the company could now increase its geographical presence in America to tap into rising demand from millennials.
• These trends are expected to lead to an increase in the share of reduced-risk products in total revenue from 13.8% in 2018 to almost 18% in 2021, eating into the share of cigarettes.

Combustible Products

• Cigarette shipments have been declining over recent years, due to changing consumer preferences as more people are moving toward non-combustible offerings.
• Segment revenue is expected to show marginal growth in the next two years as the company is expected to resort to price increase to mitigate the effect of lower shipments.

Total Revenue and Profitability Trend

• For the full year, we expect net revenue to increase by 1.3% to $30 billion in 2019 from $29.6 billion in 2018, and further by 4% to $31.2 billion in 2020, as sales under the company’s heated tobacco segment are expected to pick up further.
• Revenue could go over $32 billion in 2021 as the reduced-risk products’ segment is expected to continue its strong growth.
• Net income margin is expected to increase marginally to 26.9% in 2019, due to lower interest and tax outgo, coupled with a gradual phasing out of the discounts on IQOS, partially offset by litigation expenses and deconsolidation losses.
• Margins are expected to rise to 28% in 2020 and further to 29% in 2021, led by higher revenue and increasing market share of heated tobacco products.

Stock Price Outlook

• As per Philip Morris Valuation by Trefis, we have a price estimate of $94 per share for PM’s stock, based on projected EPS of $5.62 in 2020 and price-to-earnings multiple of 16.8x.
• However, if the reduced-risk segment is able to add $2 billion to its revenues by 2021, the company’s EPS could rise very close to $6 per share in 2021.
• In this case, the company’s stock could touch $100 per share.
• This would be the first time since April 2018 that the company’s stock could break the three-digit ceiling.

Thus, Philip Morris would primarily depend on growth in its smokeless products division to help drive a further surge in its stock price.

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