Is There A Better Pick Over Philip Morris Stock?

PM: Philip Morris logo
Philip Morris

We think that Bristol Myers Squibb stock (NYSE: BMY) currently is a better pick compared to the tobacco giant Philip Morris stock (NYSE: PM), given BMS’ better prospects and comparatively lower valuation. BMY stock trades at a P/S ratio of 3.3x, compared to 4.6x for PM stock. We compare these two companies due to their similar market cap. Although both the companies saw a similar rise in revenue over the last twelve months, the growth has been much better for BMS in the long run.

If we look at stock returns, BMS’ 17% growth is better than the 6% returns for Philip Morris over the last twelve months. This compares with 15% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, BMS is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that BMY stock will offer better returns than PM stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Philip Morris vs. Bristol Myers SquibbWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. BMY’s Revenue Growth Has Been Stronger

  • Both companies posted similar sales growth over the last twelve months. Philip Morris’ revenue grew 9.4%, marginally higher than the 9.1% figure for BMS.
  • Looking at a longer time frame, Philip Morris’ sales grew at a CAGR of 2.1% to $31.4 billion over the last twelve months, compared to $29.6 billion in 2018, while BMS’ revenues grew at a CAGR of 29.2% to $46.4 billion currently, compared to $22.6 billion in 2018.
  • Note that BMS’ revenue growth has been aided by its Celgene acquisition in 2019.
  • Philip Morris sells its tobacco products in the non-U.S. markets. Revenue is generated from the sale of cigarettes and its flagship smokeless tobacco offering – IQOS. The company’s revenue growth was impacted during the pandemic due to supply disruptions.
  • More recently, the company has planned to exit the Russia market, owing to complexity arising from the geopolitical crisis. Russia is a big market for tobacco products and an exit will impact Philip Morris’ financials in the near term.
  • For perspective, the Eastern European market, which includes Russia and Ukraine accounted for 11% of the company’s total sales in 2021.
  • The recent rise in BMS revenue has been led by a rebound in demand post-pandemic induced lockdowns.
  • BMS’ anticoagulant – Eliquis – continues to gain market share and bolster the company’s overall top-line growth. However, it now faces biosimilar competition for its top-selling drug – Revlimid.
  • Our Philip Morris Revenue and Bristol Myers Squibb Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, BMS’ revenue is expected to grow at a faster pace compared to Philip Morris over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 8.2% for BMS, compared to a 1.6% CAGR for Philip Morris, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Philip Morris Is More Profitable

  • Philip Morris’ operating margin of 38.9% over the last twelve months is much better than 14.9% for BMS.
  • This compares with 33.1% and 22.6% figures seen in 2019, before the pandemic, respectively.
  • Philip Morris’ free cash flow margin of 38.1% is also better than 34.9% for BMS.
  • Our Philip Morris Operating Income and Bristol Myers Squibb Operating Income dashboards have more details.
  • Looking at financial risk, Philip Morris’ 19% debt as a percentage of equity is lower than 28% for BMS, while its 11% cash as a percentage of assets is lower than 16% for the latter, implying that Philip Morris has a better debt position but BMS has more cash cushion.

3. The Net of It All

  • We see that BMS has demonstrated better revenue growth, it has a better cash cushion, and it is available at a comparatively lower valuation. However, Philip Morris is more profitable, and it has a better debt position.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe BMS is currently the better choice of the two.
  • The table below summarizes our revenue and return expectation for Philip Morris and BMS over the next three years and points to an expected return of 46% for BMY over this period vs. 12% expected return for PM stock, implying that investors are better off buying BMY over PM, based on Trefis Machine Learning analysis – Philip Morris vs. Bristol Myers Squibb – which also provides more details on how we arrive at these numbers.

While BMY stock may outperform PM, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Medtronic vs. Masco.

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 Mar 2022
MTD [1]
YTD [1]
Total [2]
PM Return -7% -1% 3%
BMY Return 7% 18% 26%
S&P 500 Return 5% -3% 106%
Trefis MS Portfolio Return 3% -7% 266%

[1] Month-to-date and year-to-date as of 3/31/2022
[2] Cumulative total returns since the end of 2016

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