Should You Buy Philip Morris Stock Over Its Sector Peer?

PM: Philip Morris logo
Philip Morris

We believe that Colgate-Palmolive Stock (NYSE: CL) is currently a better pick over the tobacco giant Philip Morris stock (NYSE: PM) in the consumer defensive sector. Although Philip Morris is trading at a comparatively higher valuation of 5.0x trailing revenues vs. 3.8x for Colgate-Palmolive, this gap in the valuation makes sense to some extent, mainly given the tobacco company’s superior profitability, as discussed below.

If we look at stock returns, Philip Morris, with a 1% fall in the last twelve months, has outperformed Colgate-Palmolive, down 7%, and the broader markets, with the S&P500 index falling 15%. There is more to the comparison, and in the sections below, we discuss why we believe CL 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, in an interactive dashboard analysis of Philip Morris vs. Colgate-PalmoliveWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Colgate-Palmolive’s Revenue Growth Has Been Better In Recent Years

  • Both companies posted sales growth over the last twelve months. Still, Philip Morris’ revenue growth of 3.5% is marginally better than 2.3% for Colgate-Palmolive.
  • However, if we were to look at a longer time frame, Colgate-Palmolive fares better, with its sales rising at an average annual growth rate of 3.9% to $17.4 billion in 2021, vs. $15.5 billion in 2018, 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.
  • In late 2022, Philip Morris acquired over a 90% stake in Swedish Match AB in a $16 billion deal, which will strengthen its position in smokeless products.
  • Colgate-Palmolive is a leading manufacturer and distributor of household, health care, personal care, and veterinary products, operating in global markets. It derives around 45% of its revenue from oral care products.
  • It has also seen its sales rise over the recent quarters based on pricing growth, partly offset by volume decline and forex headwinds. This trend is expected to continue in the near term, with the dollar strengthening and a challenging macroeconomic environment.
  • Our Philip Morris Revenue Comparison and Colgate-Palmolive 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 both – Philip Morris and Colgate-Palmolive – 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.
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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 16.1% for Colgate-Palmolive.
  • This compares with 31.8% and 21.0% figures in 2019, before the pandemic, 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 Colgate-Palmolive Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Philip Morris’ 34.9% debt as a percentage of equity is much higher than 12.9% for Colgate-Palmolive, while its 11.9% cash as a percentage of assets is higher than just 5.8% for the latter, implying that Colgate-Palmolive has a better debt position, but Philip Morris has more cash cushion.

3. The Net of It All

  • We see that Colgate-Palmolive has demonstrated better revenue growth in recent years, 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 Colgate-Palmolive is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Philip Morris and Colgate-Palmolive over the next three years and points to an expected return of 10% for CL over this period vs. a 1% expected return for PM stock, implying that investors are better off buying CL over PM, based on Trefis Machine Learning analysis – Philip Morris vs. Colgate-Palmolive – which also provides more details on how we arrive at these numbers.

While CL 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.

Returns Jan 2023
MTD [1]
YTD [1]
Total [2]
PM Return 0% 0% 11%
CL Return -2% -2% 17%
S&P 500 Return 4% 4% 78%
Trefis Multi-Strategy Portfolio 8% 8% 239%

[1] Month-to-date and year-to-date as of 1/13/2023
[2] Cumulative total returns since the end of 2016

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