Philip Morris Looks Undervalued

by Trefis Team
+8.45%
Upside
78.10
Market
84.70
Trefis
PM
Philip Morris International
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Despite a 20% rise since the March 23 lows of this year, at the current price of about $72 per share we believe that Philip Morris stock (NYSE: PM) has more upside left. PM’s stock has rallied from $60 to $72 off the recent bottom compared to the S&P which moved 39%. The stock lagged the overall market as the stock saw a smaller drop compared to the market in the first place during the crisis, as it belongs to a relatively defensive sector. Additionally, the stock is still about 14% lower than the level seen at the end of 2019, just about 6 months ago.

Philip Morris’ stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise, since the March 23 lows, we feel that the company’s stock still has potential as it has performed better than the market during the recent downward cycle, and also the gradual lifting of lock down would benefit PM as it expands in the US market with its IQOS brand. Our dashboard What Factors Drove -22% Change In Philip Morris International Inc Stock Between 2017 And Now? has the underlying numbers

Some of the drop in stock price during the last 2 years is justified by the 24% drop in P/E multiple from 24x in 2017 to 18x in 2019. The multiple further dropped to below 16x currently. This is despite the fact that Philip Morris revenues increased by 3.7% while net income margin grew 17.6% during the same period. On a per share basis, earnings increased from $3.88 in 2017 to $4.61 in 2019, as shares outstanding remained almost stable.

Thus, the drop in P/E multiple over the last 2 years was mainly driven by a drop in stock price as the sales of cigarettes went down, and regulatory authorities in the US started cracking down on the sale of flavored e-cigarettes (just after giving a green light to the sale of IQOS – PM’s flagship smokeless tobacco product – in the US).

Trigger and Timing for Further Upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Though tobacco is largely a defensive industry, with Philip Morris having global operations spread across continents, it is facing supply bottlenecks due to the lock down. This was reflected in its Q1 2020 results, where cigarette shipments saw a y-o-y drop of 4.4%.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

If the adverse effect of the current pandemic is abated in the beginning of Q3 2020, we believe there is an opportunity for the P/E multiple to return to its recent historical average of about 17x, as supply bottlenecks are eased and PM is also able to expand its IQOS brand in the US. 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.

While Philip Morris is likely to see a further upside in stock price post-Covid, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight, see why PM’s rival Altria’s stock fell over 30% with revenues being almost flat

 

See all Trefis Price Estimates and Download Trefis Data here

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