Even after being a part of a largely defensive sector, Philip Morris stock (NYSE: PM) saw an impressive rise of 30% from its March 2020 lows of this year. Despite such a healthy rise, at the current price of $78, we believe PM’s stock is still undervalued. The stock has increased from $60 in March to $78 currently as against the S&P 500 which clocked a 47% rise during the same period. In spite of a healthy rise over recent months, PM’s stock has underperformed the market as the drop in the stock price during the coronavirus crisis was much less than the broader market’s drop in the first place. Thus, the recovery has been lower than the market.
But despite rising 30% in 6 months, PM’s stock is still close to 15% below its pre-crisis (February 2020) peak. We believe that the gradual lifting of lockdowns will lead to higher shipments and revenues as supply constraints ease, leading to a possible rise of 10% from its current level. Our dashboard What Factors Drove -15% Change In Philip Morris International Inc Stock Between 2017 And Now? has the underlying numbers behind our thinking.
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The drop in PM’s stock price between 2017-2019 was led by a 24% drop in the P/E multiple from 24x to 18x during this period. Philip Morris’ revenues increased 3.7% between 2017-2019, while margins went up from 22% to 26%. On a per share basis, earnings increased from $3.88 in 2017 to $4.61 in 2019. Despite higher earnings, the P/E multiple decreased during those two years. This was mainly because the company’s earnings shot up but the stock price, in fact, went down. The revenue growth seen over recent years was due to higher prices charged for cigarettes, whereas changing consumer preferences led to a steady drop in the number of cigarettes sold. Consumers have increasingly bought e-cigarettes (like PM’s IQOS brand), but the regulatory crackdown against flavored e-cigarettes and a global debate around the safety of such products led to a decline in the P/E multiple and thus stock price. The P/E multiple dropped further in 2020 following the outbreak of the pandemic, but has recovered partially over recent months and now stands at 17x.
What is the upside trigger?
The global spread of coronavirus which led to lockdown in various cities across the globe, affected industrial and economic activity, in turn adversely affecting consumption and consumer spending. Despite tobacco being a defensive industry, PM’s stock was affected by the crisis as Philip Morris’ operations are spread across geographies, with the lockdowns imposing significant impediments in its global supply network. This was reflected in PM’s Q2 2020 results, where PM reported a 17.6% y-o-y drop in cigarette shipments, with total revenue seeing 13.6% decline while earnings dropped 16%.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With the global lockdowns gradually being lifted, Philip Morris’ supply constraints are expected to ease over the coming months. Shipments and sales numbers are expected to pick up from Q4 2020. Rising demand for IQOS, higher cigarette prices, and a normalized supply network could result in healthy revenue and margin growth in 2021. As investors’ focus has now shifted to 2021 numbers, the market is likely to overlook the near term volatility. The recent spike in Covid-positive cases in the US is a cause for worry for the company as re-imposition of another lockdown will be a major impediment to the stock’s recovery. However, another lockdown looks unlikely as of now. In the absence of any further lockdowns such as were seen in the first half of 2020, the stock is likely to see around 10% potential upside from its current level. As per Philip Morris valuation, Trefis has a price estimate of $85 per share for PM’s stock
For further insight into the tobacco space, see why PM’s rival Altria’s stock fell over 30% with revenues being almost flat
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