This Company Is Likely To Offer Better Returns Over Philip Morris Stock

PM: Philip Morris logo
Philip Morris

We think that Starbucks stock (NASDAQ: SBUX) currently is a better pick compared to the tobacco giant Philip Morris stock (NYSE: PM), given Starbucks’ better prospects and comparatively lower valuation. SBUX stock trades at a P/S ratio of 3.1x, compared to 4.7x for PM stock. We compare these two companies due to their similar revenue base. Although both the companies saw a rise in revenue in the recent past, Starbucks’ growth has been much better.

If we look at stock returns, Philip Morris’ 9% growth is much better than the -20% change for Starbucks over the last twelve months. This compares with 12% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Starbucks is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that SBUX 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 of Starbucks vs. Philip MorrisWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Starbucks’ Revenue Growth Has Been Stronger

  • Both companies posted sales growth over the last twelve months. Still, Starbucks’ revenue growth of 30.1% is much higher than 9.4% for Philip Morris.
  • Looking at a longer time frame, Starbucks’ sales grew at a CAGR of 6.5% to $29.1 billion in 2021, compared to $24.7 billion in 2018, while Philip Morris’ sales grew at a CAGR of 2.1% to $31.4 billion, currently, compared to $29.6 billion in 2018.
  • Philip Morris sells its tobacco products in non-U.S. markets. Revenue is generated from the sale of cigarettes and its flagship smokeless tobacco offering – IQOS. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic.
  • More recently, the company has planned to exit the Russian market, owing to the 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.
  • Starbucks saw its sales decline in low double-digits in 2020 due to lockdowns. However, over the last year or so, it has seen a strong rebound in demand in both North America and the International markets. The revenue for both segments in 2021 was higher than in 2019, before the pandemic.
  • Starbucks also suspended its operation in Russia. More recently, it announced that it is stopping share repurchases with an immediate effect, with the focus shifting on investing profits into operations. [1]
  • Our Starbucks Revenue and Philip Morris Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Starbucks’ 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 6.5% for Starbucks, 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 But Comes With Higher Risk

  • Philip Morris’ operating margin of 38.9% over the last twelve months is much better than 19.9% for Starbucks.
  • This compares with 33.1% and 19.3% figures seen in 2019, before the pandemic, respectively.
  • Philip Morris’ free cash flow margin of 38.1% is better than 18.4% for Starbucks.
  • Our Starbucks Operating Income and Philip Morris Operating Income dashboards have more details.
  • Looking at financial risk, Philip Morris’ 19% debt as a percentage of equity is higher than 15% for Starbucks, while its 11% cash as a percentage of assets is lower than 15% for the latter, implying that Starbucks has a better debt position as well as more cash cushion.

3. The Net of It All

  • We see that Starbucks has demonstrated better revenue growth and lower risk and is available at a comparatively lower valuation. However, Philip Morris is more profitable.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Starbucks is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Starbucks and Philip Morris over the next three years and points to an expected return of 22% for Starbucks over this period vs. a 9% expected return for PM stock, implying that investors are better off buying SBUX over PM, based on Trefis Machine Learning analysis – Starbucks vs. Philip Morris – which also provides more details on how we arrive at these numbers.

While SBUX 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 Philip Morris vs. Coca-Cola.

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 Apr 2022
MTD [1]
YTD [1]
Total [2]
SBUX Return -3% -25% 59%
PM Return 2% 1% 5%
S&P 500 Return 1% -4% 105%
Trefis MS Portfolio Return 2% -5% 272%

[1] Month-to-date and year-to-date as of 4/5/2022
[2] Cumulative total returns since the end of 2016

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  1. Starbucks’s new C.E.O. scraps stock buybacks to ‘invest more profit into our people.’, Andrew Ross Sorkin and Lauren Hirsch, The New York Times, Apr 4, 2022 []