This Chemical Company Is A Better Pick Over Philip Morris Stock

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Philip Morris

We think that Linde stock (NYSE: LIN) currently is a better pick compared to the tobacco giant Philip Morris stock (NYSE: PM), given Linde’s better prospects. Although these companies are from different sectors, we compare them due to their similar revenue base of around $32 billion, and the similar market capitalization of over $160 billion. Looking at valuation, both are comparable with PM stock trading at a P/S ratio of 5.2x, compared to 5.3x for LIN stock.

If we look at stock returns, Linde’s 14% growth is better than the 7% change for Philip Morris over the last twelve months. This marks an outperformance with -3% change in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Linde is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that LIN 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 Philip Morris vs. LindeWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Linde’s Revenue Growth Has Been Stronger

  • Both companies posted sales growth over the last twelve months. Still, Linde’s revenue growth of 14.5% is higher than 8.4% for Philip Morris.
  • Looking at a longer time frame, Philip Morris’ sales grew at an average growth rate of 2.1% to $31.4 billion in 2021, compared to $29.6 billion in 2018, while that of Linde’s grew at 33.3% to $30.8 billion in 2021, compared to $14.8 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 scaled down its Russian operations, owing to the complexity arising from the geopolitical crisis. Russia is a big market for tobacco products, and the company’s plans to fully exit this market will impact its 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. Philip Morris reported 2% growth in net revenues in Q1 2022, driven by a significant 24% growth in Middle East & Africa sales.
  • Linde – the world’s largest industrial gas company (by market share and revenue) has seen its revenue growth driven by higher volume and better pricing. The strong average growth rate for Linde can be attributed to its merger with Praxair in late 2018.
  • The ongoing Russia-Ukraine war is likely to have a minimal impact on Linde, with Russia accounting for around 1% of total sales while the sales in Ukraine are immaterial.
  • Our Philip Morris Revenue and Linde Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Linde’s 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 1.6% for Philip Morris, compared to a 14.5% CAGR for Linde, 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 And It Has Better Cash Cushion

  • Philip Morris’ operating margin of 36.8% over the last twelve months is much better than 17.0% for Linde.
  • This compares with 31.8% and 11.0% figures seen in 2019, before the pandemic, respectively.
  • Philip Morris’ free cash flow margin of 40.1% is better than 30.3% for Linde.
  • Our Philip Morris Operating Income and Linde Operating Income dashboards have more details.
  • Looking at financial risk, Philip Morris’ 18% debt as a percentage of equity is marginally higher than 17% for Linde, while its 11% cash as a percentage of assets is higher than 5% for the latter, implying that Linde has a slightly better debt position and Philip Morris has more cash cushion.

3. The Net of It All

  • We see that Linde has demonstrated better revenue growth and it has a slightly better debt position. However, Philip Morris is more profitable and it has more cash cushion. Both the companies are trading at similar valuation of around 5x trailing revenues.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Linde is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Philip Morris and Linde over the next three years and points to an expected return of 36% for Linde over this period vs. a 5% expected return for Philip Morris stock, implying that investors are better off buying LIN over PM, based on Trefis Machine Learning analysis – Philip Morris vs. Linde – which also provides more details on how we arrive at these numbers.

While LIN 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 Consolidated.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jun 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
PM Return -1% 11% 15%
LIN Return 2% -4% 113%
S&P 500 Return -1% -14% 84%
Trefis Multi-Strategy Portfolio 1% -18% 224%

[1] Month-to-date and year-to-date as of 6/6/2022
[2] Cumulative total returns since the end of 2016

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