We believe Philip Morris stock (NYSE: PM) is a decent opportunity at the present time. PM trades at $77 currently and is, in fact, down 10% so far this year. It traded at a pre-Covid high of $88 in February and is 13% below that level now. PM stock has gained 28% from the low of $60 seen in March 2020, less than the S&P 500 which is up 60% from its March bottom. 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, due to the company belonging to a largely defensive tobacco sector. Thus, the stock recovery has been lower than the market. However, we believe that the gradual lifting of lockdowns over recent months is leading to an improvement in supply networks and consumer demand. Rising demand for IQOS (smokeless tobacco brand), higher cigarette prices, and a normalized supply network is expected to result in healthy revenue and margin growth in 2021. This will likely drive the stock up 10% from its current level. Our conclusion is based on our detailed comparative analysis on Philip Morris stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline for 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 60% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here is how PM stock and the broader market performed during the 2007-08 crisis.
Timeline for 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
PM vs S&P500 Performance Over 2007-08 Financial Crisis
PM stock declined from levels of close to $55 in September 2008 to levels of little over $33 in March 2009 (as the markets bottomed out), implying PM stock lost close to 40% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $48 in early 2010, rising by 44% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.
PM Fundamentals Over Recent Years
Philip Morris revenues increased from $26.7 billion in 2016 to $29.8 billion in 2019 due to higher shipments of IQOS and increase in cigarette prices. Along with higher revenues, margins also increased which was reflected in the EPS which went up from $4.48 to $4.61 during this period. However, revenues saw a y-o-y decline of 4% in the first nine months of 2020 due to the impact of the pandemic. During the same period, earnings improved as the company spent less on marketing.
Does PM Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
PM’s total debt increased from $26.5 billion in 2016 to $29.5 billion at the end of Q3 2020, while its total cash increased from $4.2 billion to $4.8 billion over the same period. At the same time, the company’s cash from operations which was $8.1 billion in 2016, stood at $6.7 billion in the first nine months of 2020. Though debt has increased, the company’s increased cash balance and improving CFO generation capacity over the years is likely to help PM weather the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Philip Morris International Inc stock has the potential for modest gains of close to 10% once fears surrounding the Covid outbreak are put to rest. As per Philip Morris valuation, Trefis has a price estimate of $85 per share for PM’s stock.
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