Is Philip Morris Stock A Better Pick Over Its Sector Peer?

PM: Philip Morris logo
Philip Morris

We believe that the tobacco giant Philip Morris stock (NYSE: PM) is a better pick over its sector peer, Procter & Gamble stock (NYSE: PG), given its better prospects. Although P&G is trading at a slightly lower valuation of 4.3x trailing revenues vs. 4.8x for Philip Morris, this gap in the valuation makes sense, mainly given the latter’s superior profitability, as discussed below.

If we look at stock returns, Philip Morris, with a rise of 3% year-to-date, has outperformed P&G, down 10%, and the broader markets, with the S&P500 index falling 17%. There is more to the comparison, and in the sections below, we discuss why we believe PM stock will offer better returns than PG stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Philip Morris vs. Procter & GambleWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. P&G’s Revenue Growth Is Better

  • Both companies posted sales growth over the last twelve months. Still, P&G’s revenue growth of 4.3% is marginally better than 3.5% for Philip Morris.
  • Even if we were to look at a longer time frame, P&G fares better, with its sales rising at an average annual growth rate of 5.8% to $80.2 billion in fiscal 2022 (fiscal ends in June), compared to $67.7 billion in 2019, while Philip Morris’ sales grew at an average rate just 2.1% to $31.4 billion in 2021, vs. $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 has recently acquired over a 90% stake in Swedish Match AB in a $16 billion deal, which will strengthen its position in smokeless products.
  • P&G’s largest segment is Fabric & Home Care, contributing around 35% of the company’s revenues. It has also seen a steady rise in sales over recent years. In fiscal 2022, the company reported a 5% rise in total sales, driven by a 2% growth in unit volume.
  • Our Philip Morris Revenue Comparison and Procter & Gamble Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, both companies are expected to grow their revenue at a similar pace 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 1.7% CAGR for P&G, based on Trefis Machine Learning analysis.
  • In fact, P&G guidance indicates a cut in sales between 1% and 3% in fiscal 2023, and earnings likely to remain at fiscal 2022 levels of $5.81, as it braces for a $3.9 billion headwind from forex and higher costs.
  • 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.
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2. Philip Morris Is More Profitable

  • Philip Morris’ operating margin of 35.4% over the last twelve months is higher than 22.5% for P&G.
  • This compares with 31.8% and 22.7% figures in 2019 and fiscal 2020, respectively.
  • Philip Morris’ free cash flow margin of 36.9% is better than 20.1% for P&G.
  • Our Philip Morris Operating Income Comparison and Procter & Gamble Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Philip Morris’ 36.3% debt as a percentage of equity is much higher than 9.3% for P&G, while its 13.2% cash as a percentage of assets is higher than just 5.8% for the latter, implying that P&G has a better debt position, but Philip Morris has more cash cushion.

3. The Net of It All

  • We see that P&G has demonstrated better revenue growth, has a better debt position, and is available at a relatively lower valuation. On the other hand, Philip Morris is more profitable and has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Philip Morris is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Philip Morris and P&G over the next three years and points to an expected return of 8% for PM over this period vs. a -1% expected return for PG stock, implying that investors are better off buying PM over PG, based on Trefis Machine Learning analysis – Philip Morris vs. Procter & Gamble – which also provides more details on how we arrive at these numbers.

While PM stock looks like it can outperform PG 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.

Returns Nov 2022
MTD [1]
YTD [1]
Total [2]
PM Return 6% 3% 7%
PG Return 9% -10% 74%
S&P 500 Return 2% -17% 77%
Trefis Multi-Strategy Portfolio 2% -20% 215%

[1] Month-to-date and year-to-date as of 11/29/2022
[2] Cumulative total returns since the end of 2016

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