Is There A Better Pick Over Philip Morris Stock?

We believe that Turning Point Brands stock (NYSE: TPB), a relatively small tobacco company, currently is a better pick compared to the tobacco giant Philip Morris stock (NYSE: PM), given Turning Point Brand’s comparatively lower valuation of 0.7x trailing revenues, vs. 4.3x for Philip Morris, and its better prospects. This gap in the valuation can partly be attributed to Philip Morris’ superior profitability.

If we look at stock returns, Philip Morris, despite a fall of 13% year-to-date, has outperformed Turning Point Brands, down 44%, as well as the broader markets, with the S&P500 index falling 26%. There is more to the comparison, and in the sections below, we discuss why we believe TPB 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. Turning Point Brands: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Turning Point Brands’ Revenue Growth Is Better

• Both companies posted similar sales growth over the last twelve months. Turning Point Brands’ revenue growth of 5.0% compared with 5.5% for Philip Morris.
• If we were to look at a longer time frame, Turning Point Brands has outperformed, with its sales rising at an average annual average growth rate of 10.2% to $445.5 million in 2021, compared to $332.7 million in 2018, while Philip Morris’ sales grew at an average rate just 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.
• The company also is in the process of acquiring Swedish Match AB in a $16 billion deal, which will strengthen Philip Morris’s position in smokeless products.
• Our Philip Morris Revenue dashboard provides more insight into the companies’ sales.
• Turning Point Brands sells vapor products, chewing tobacco, rolling papers, and cigar wraps, among others. Its Zig-Zag segment, which includes rolling papers, cigar wraps, and smoking accessories, has been driving sales growth in recent years.
• Of late Turning Point Brands is seeing a decline in its vapor business due to regulatory changes, primarily implementing a new rule in the Prevent All Cigarette Trafficking (PACT) Act late last year. After the recent regulatory changes, it has become challenging for anything related to vapor to be mailed to businesses or consumers.
• Turning Point Brands’ NewGen segment (which includes vapor products) sales were down a significant 41% in the first half of this year, accounting for just 23% of its total net sales (compared to 35% in the prior year period).
• That said, the company’s other segments – Zig-Zag and Stoker have been doing very well, a trend expected to continue in the coming years.
• Looking forward, Turning Point Brands’ revenue is expected to grow faster than 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 15.2% for Turning Point Brands, compared to a 1.6% CAGR for Philip Morris, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 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.

2. Philip Morris Is More Profitable

• Philip Morris’ operating margin of 36.2% over the last twelve months is much higher than 12.6% for Turning Point Brands.
• This compares with 33.1% and 4.5% figures seen in 2019, before the pandemic, respectively.
• Philip Morris’ free cash flow margin of 39.5% is better than 11.1% for Turning Point Brands.
• Our Philip Morris Operating Income and Turning Point Brands Operating Income dashboards have more details.
• Looking at financial risk, Philip Morris’ 42% debt as a percentage of equity is much lower than 108% for Turning Point Brands, while its 13% cash as a percentage of assets is lower than 20% for the latter, implying that Philip Morris has a better debt position, but Turning Point Brand has more cash cushion.

3. The Net of It All

• We see that Turning Point Brands has demonstrated better revenue growth, has more cash cushion, and is available at a relatively lower valuation. On the other hand, Philip Morris has a better debt position and 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 Turning Point Brands is currently the better choice of the two.
• The table below summarizes our revenue and return expectations for Philip Morris and Turning Point Brands over the next three years and points to an expected return of 41% for Turning Point Brands over this period vs. a 15% expected return for Philip Morris stock, implying that investors are better off buying TPB over PM, based on Trefis Machine Learning analysis – Philip Morris vs. Turning Point Brands – which also provides more details on how we arrive at these numbers.

While TPB stock looks like it can outperform PM stock, it is helpful to see how Philip Morris’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Philip Morris vs. Entergy.

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.

[1] Month-to-date and year-to-date as of 10/3/2022
[2] Cumulative total returns since the end of 2016

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