Comparing Philip Morris’s Valuation Multiple against Its Peers
We are considering the forward PE (price-to-earnings) multiple for our analysis due to the high visibility of Philip Morris International’s (PM) earnings. The forward PE multiple is calculated by dividing the company’s stock price by the analysts’ earnings estimate for the next four quarters.
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PM’s forward PE multiple
On October 10, 2017, Philip Morris (PM) was trading at a forward PE multiple of 21.9x compared to its multiple of 23.3x, which the company posted before the announcement of its 2Q17 earnings. The lower-than-expected 2Q17 earnings and the lowering of its 2017 EPS guidance by the company’s management appear to have led to a decline in its stock price and forward PE multiple.
On July 28, 2017, the FDA announced that it’s planning to reduce the nicotine levels in cigarettes to non-addictive levels in the US. This pressured the stock price of Altria Group (MO), which markets its products in the US.
However, the announcement did not affect the stock price of Philip Morris significantly, as it also sells products outside the US. The FDA’s announcement and the growth in sales of its RRPs has allowed the company to trade at a higher valuation multiple than Altria. On the same day, Altria was trading at a forward PE multiple of 18.7x.
To support the health of its customers and drive its sales, Philip Morris (PM) has developed four RRP (reduced-risk product) platforms. The company has introduced its first platform product, iQOS, in 27 markets and has been investing to increase the awareness of the product.
The other three platforms are in various stages of testing. If these new products fail to generate the expected sales, the rise in expenditures could put pressure on Philip Morris’s earnings.
For the next four quarters, analysts expect Philip Morris’s EPS to rise 15.4%, which could have been baked into its current stock price. If the company posts earnings below the Wall Street analysts’ estimates, the selling pressure could subdue its stock price and valuation multiple down.
In the final part of this series, we’ll look at analysts’ recommendations for Philip Morris.