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What Could Philip Morris’s 1Q16 Results Do to Its High Valuation?

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Nov. 20 2020, Updated 4:52 p.m. ET

Relative valuation

As of April 6, 2016, Philip Morris International (PM) and Altria Group (MO) were trading at higher valuations than the S&P 500 Index (IVV) (SPY) (VOO) and the Dow Jones Industrial Average (DIA). Philip Morris now trades at a PE (or price-to-earnings) multiple of 21.7x forward earnings while Altria Group trades at 20.5x forward earnings.

In comparison, the S&P 500 Index and the Dow Jones Industrial Average were trading at forward PE multiples of 16.9x and 16.3x, respectively, as of April 6.

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Valuation versus peers

By comparison, Japan Tobacco (JAPAY) (JAPAF) and British American Tobacco (BTI) are trading at lower PE multiples of 17.9x and 18.1x, respectively, compared with Philip Morris. Reynolds American (RAI) is also trading at a valuation of 20.9x forward earnings, which is lower than Philip Morris.

Despite the current environment, Philip Morris delivered strong 2015 market share results. Marlboro increased its international market share, excluding China and the US, by 0.2 points to 9.6%, befitting from the roll out of Marlboro 2.0 Architecture. This positive share performance was primarily due to reduced gaps since the start of the year, following price increases for low-priced brands, which led to adult smokers to upgrade to Marlboro and Fortune.

Innovation and geographical diversity

Philip Morris is planning to strengthen its portfolio of investments in brand initiatives, including new launches and innovative line extension. According to CFO Jacek Olczak, after conducting the clinical tests for iQOS, the average reductions in biomarkers of exposure for adult smokers who switched to iQOS reached over 95%.

Additionally, PM is focusing on the commercialization of iQOS, which is underscored by our favorable HeatStick offtake share momentum in Japan. PM is geographically diverse, which acts as a key growth catalyst. The company has exposure to the emerging market economies, which offer huge growth potential, as well as to developed economies, which have high margins. Notably, PM made up 1.7% of the iShares Global 100 ETF (IOO) as of April 7, 2016.

For more on Philip Morris’s 4Q15 results, check out “Foreign Exchange Headwinds Hit Philip Morris Hard in 4Q15.” For more industry updates and analysis—and for upcoming earnings releases—keep checking in with Market Realist’s Consumer Products page.

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