This Tobacco Stock Looks Better Than Altria

by Trefis Team
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PM
Philip Morris International
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The shares of Philip Morris (NYSE: PM) are currently trading at $89 per share which is more than 7% above its pre-Covid level. On the other hand, shares of Altria (NYSE: MO) are trading at $44 per share, which is less than 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 $146 billion compared to Altria’s $82 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 0.7% in the last three years. Philip Morris revenues saw a marginal decline during this period. Similarly, for the last twelve months, MO registered 3.2% revenue growth, slightly better than PM. 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 the 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 the sale of cigarettes and its flagship smokeless tobacco offering – IQOS.

Returns (Profits)

  • Philip Morris has superior profitability compared to Altria. Philip Morris’ average margins over the last three years have been over 34%, while Altria’s stood at 22%.
  • Even when you look at the last twelve month period, PM’s margins at 38% are still much better than MO’s margins of less than 27%.
  • 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 12% of total assets compared to Altria’s metric of 4%.

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 6%, as against -32% 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 the 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.

 

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Nov 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
PM Return -7% 7% -3%
MO Return -8% 7% -35%
S&P 500 Return 1% 22% 105%
Trefis MS Portfolio Return -3% 46% 297%

[1] Month-to-date and year-to-date as of 11/29/2021
[2] Cumulative total returns since 2017

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