Philip Morris’ Stock Down 12% Despite Revenue Growth; Time To Buy?

by Trefis Team
Philip Morris International
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Philip Morris’ stock (NYSE: PM) lost about 12% of its value in the last 3 years, with the stock price dropping from $77 at the end of 2016 to $68 as of 18th May 2020. At the same time, Philip Morris’ revenues steadily increased from $26.7 billion in 2016 to $29.8 billion in 2019. Our interactive dashboard Why Is There A Mismatch In The Rate At Which Philip Morris International Inc’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.

But how did the company’s stock suffer this beating with Philip Morris’ revenues seeing a corresponding increase of 12% in the last 3 years? Well, of course there is a reason – it’s earnings (profits earned after all the expenses and taxes) and future growth outlook. Turns out Philip Morris’ earnings margins (profits as a % of revenue) have seen a lot of volatility in recent years, with the margin falling from 26% in 2016 to 24% in 2019.

So how did Philip Morris see a decline in earnings margins despite healthy revenue growth? Our interactive dashboard on Philip Morris Expenses provides the detailed picture.

One change – increased focus on heated tobacco products and providing incentives and discounts to push the same in the market. Philip Morris ventured into the heated tobacco products in 2016, and since then has been offering deep discounts to customers and incurring significant expenditure on research, promotion, and marketing of its brand IQOS. This strategy saw the company’s marketing, research and administration (MAR) cost rise from $6.4 billion in 2016 to $8.8 billion in 2019, reflecting an increase in MAR cost as a % of net revenue from 23.9% in 2016 to 29.4% in 2019. Such a sharp rise more than offset any gains which the company recorded in the form of lower excise and cost of sales. However, a combination of these factors – 12% increase in revenue and 8% fall in margins – meant earnings per share (EPS) in fact saw a marginal increase from $4.48 in 2016 to $4.61 in 2019.

Though, the market does not seem to be too impressed with this, with the company’s P/E multiple dropping from 17.3x in 2016 to 14.8x currently. The reason is 2-fold: Philip Morris entered the US market (got FDA approval for IQOS in 2019) at a time when regulators are cracking down on e-cigarette makers, while many developing nations have also spoken in favor of such a crackdown. Additionally, the outbreak of coronavirus has affected US and Europe the most, one being a future market and the other an existing large market for Philip Morris. The decline in P/E multiple reflects the markets’ subdued growth expectations for PM.

If the adverse effect of the current pandemic is abated by the end of Q2 2020, we believe there is an opportunity for the P/E multiple to return to its recent historical average of 17x-18x. As per Philip Morris Valuation by Trefis, we have a price estimate of $80 per share for the company’s stock, higher than its current market price of $68.

In contrast, PM’s rival Altria’s stock fell over 30% with revenues being almost flat. At this point it would be interesting to compare how Philip Morris’ revenue trends stand in comparison to Altria.


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