Despite a rise of more than 60% from its March 2020 lows, Philip Morris stock (NYSE: PM) still looks slightly undervalued. PM stock has rallied from $61 to $99 off its recent bottom as against the S&P 500 which increased almost 90% from its 2020 lows. 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’s. The stock is currently close to a three-year high, 50% above levels seen in December 2018. Despite this, it still has a marginal upside of close to 5% remaining. We believe that the gradual lifting of lockdowns will lead to higher shipments (seen in Q1 2021) and revenues as supply constraints ease. With the trend of moving away from combustible tobacco products to e-cigarettes continuing to pick up, the company’s focus on its e-cigarette brand IQOS will help it further increase its market share, revenue, and earnings. Our dashboard Philip Morris International Inc (PM) Stock Has Gained 49% Since 2018 has the underlying numbers behind our thinking.
The stock price rise between 2018-2020 is justified by the 55% rise in P/S multiple. This was despite Philip Morris revenues dropping 3% from $29.6 billion to $28.7 billion during this period. Lower revenue was mainly driven by cigarette and heated tobacco unit shipment volume going down by 8.1% amidst the lockdowns imposed during the pandemic, which affected supply chains. However, margins increased during this period from 26.7% in 2018 to 28.1% in 2020 mainly because of lower cost of sales, reduced marketing expenditure, and lower excise taxes. The sharp rise in the P/S multiple has mainly been a reflection of healthy growth in the e-cigarette segment and improving margins. We believe the P/S multiple will remain elevated close to its current level, led by expectations of healthy revenue and earnings growth over the next few quarters and more people switching to heated tobacco products like IQOS.
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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 mainly in PM’s Q2 2020 results, where PM reported a 17.6% y-o-y drop in cigarette shipments, with total revenue seeing a 13.6% decline while earnings dropped 16%. For the full year 2020, PM’s revenues declined 3.7% y-o-y.
With the global lockdowns gradually being lifted, Philip Morris’ supply constraints are expected to ease over the coming months. This was reflected in Q1 2021 where the company surpassed analysts’ expectations and provided positive forecast for coming quarters. Heated tobacco shipments increased by 30% y-o-y in Q1 2021, while the market share of heated tobacco units in markets where IQOS is sold was up 1.7% to reach 7.6%. With the vaping market expected to grow at a healthy double-digit rate in the coming years, Philip Morris is expected to benefit with higher IQOS sales. Any further 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 Israel. Rising demand for IQOS, higher cigarette prices, and a normalized supply network is likely to result in healthy revenue and margin growth in the coming quarters. As investors’ focus has now shifted to 2021 and 2022 numbers, the market is likely to overlook the near-term volatility. The recent spike in Covid-positive cases in Europe 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, that looks unlikely as of now. In the absence of any further lockdowns such as were seen in the first half of 2020 and the rollout of a successful vaccination program, the recent rise in PM’s stock is justified, in fact, it is likely to rise further. As per Trefis, Philip Morris Valuation works out to $105 per share.
While Philip Morris stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Coca-Cola vs Merck shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.