Will Philip Morris Continue To Outperform Its Rivals?

by Trefis Team
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Philip Morris International
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The shares of Philip Morris (NYSE: PM) currently trade at $95 per share which is more than 14% above its pre-Covid level. On the other hand, shares of Altria (NYSE: MO) are trading at $48 per share, which is almost at the pre-Covid level. Does that mean MO is a better stock pick compared to PM? Both companies belong to the defensive tobacco sector. Philip Morris is a bigger company with a market cap of $149 billion compared to Altria’s $85 billion. Despite lower revenue growth, Philip Morris enjoys a higher valuation multiple (P/S) compared to Altria on account of better profit margins, stronger balance sheet, and higher market return. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Philip Morris International Inc vs Altria Group, Inc: Industry Peers; Which Stock Is A Better Bet?

Revenue Growth

  • Altria revenues have demonstrated better growth compared to Philip Morris over recent years, with Altria revenue expanding at 0.8% in the last three years. Philip Morris revenues saw a marginal decline during this period. Similarly, for the last twelve months, MO registered over 4% revenue growth while PM saw its revenue base shrinking by 3.7%. The primary reason behind faster revenue growth for Altria has been the recent acquisitions of JUUL and Cronos which has added to its top line even though supply lines were  affected during the pandemic.
  • Altria earns revenues from sale of cigarettes and oral tobacco in the U.S. It holds significant stakes in e-cigarette giant JUUL and the Cronos Group. Philip Morris sells its products in the non-U.S. markets. Revenue is generated from sale of cigarettes and its flagship smokeless tobacco offering – IQOS.

Returns (Profits)

  • Philip Morris has superior profitability compared to Altria. Philip Morris’ operating margins over the last three years has been 2.2%, while Altria’s stood at -10%.
  • Even when you look at the last twelve months period, PM’s margins at 38% are still much better than MO’s margins of less than 30%.
  • Philip Morris has been able to report better margins over recent years due to a rise in prices of cigarettes and some reduction in promotional expenses of IQOS. On the contrary, Altria’s margins were affected due to significant impairment charges on account of a write down of its investment value in JUUL following the FDA crackdown on e-cigarettes.

Risk

  • Philip Morris seems to have a stronger balance sheet position compared to Altria.
  • PM’s debt stands at 19% of its equity, almost half of 35% in the case of Altria.
  • Also, PM has a much better cash position, with cash being 16% of total assets compared to Altria’s metric of 10%.

Net of it all

Though Philip Morris has lower revenue growth compared to Altria, it was mainly because of major acquisitions made by Altria. In fact, Philip Morris has performed much better in all other parameters – higher profit margins and stronger cash and leverage position. For this, the company has been rewarded, which is reflected in the market return (last three years) for Philip Morris stock which stood at 16%, as against -25% for Altria stock. Also, with demand for IQOS rising, Philip Morris is likely to see better top line growth going forward. Also, with lower marketing expenses, profits also are likely to improve. With the U.S. FDA trying to control e-cigarette consumption amongst the youth, the growth in sale of IQOS in the U.S. by Altria in the coming quarters remains uncertain. As Philip Morris operates outside the U.S., it does not face this uncertainty/risk for now.

 

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