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Philip Morris’s High Market Valuation Versus S&P 500

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Sep. 15 2015, Updated 10:06 a.m. ET

Analysis

A pioneer in the cigarette and tobacco industry, Philip Morris International (PM) and its former parent company and current collaborative partner, Altria Group (MO), are trading at higher valuations relative to the S&P 500 Index (SPY) (IVV) (VOO) and the Dow Jones Industrial Average (DIA). Philip Morris is trading at a PE (price-to-earnings) multiple of 17.0x forward earnings, while Altria is trading at 18.5x forward earnings. By comparison, the S&P 500 Index and the Dow Jones Industrial Average are trading at forward PE multiples of 16.0x and 14.4x, respectively. These valuations are as of August 25, 2015.

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Growth and peer valuation

Competitors British American Tobacco (BTI) and Imperial Tobacco Group (ITYBY) are trading at PE multiples of 14.8x each, both lower than Philip Morris’s PE multiple. Reynolds American (RAI) has a valuation of 18.5x forward earnings, which is higher than Philip Morris’s, but Reynolds American’s stock price has spiked 8.7% from June 12 due to its completed acquisition of Lorillard Tobacco Company.

Markets generally tend to value companies at higher multiples if growth expectations are higher. However, Philip Morris’s revenue grew at a CAGR (compound annual growth rate) of -0.53% over the past five years. This figure was lower than peers like Japan Tobacco (JAPAF) and Altria, whose revenues grew at CAGRs of 1.4% and 2.4%, respectively.

Adapting to the regulatory framework

With various bans and restrictions on displays of tobacco products at retail outlets and on advertising and packaging, it becomes difficult for any company to establish a robust revenue growth. Accordingly, Philip Morris aims to establish strong distribution and sales strategies that address the individual characteristics of each market, in an effort to understand and adapt to the regulatory framework of various economies.

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