Of the various available valuation multiples, we’ll use the forward PE (price-to-earnings) for Philip Morris International’s (PM) earnings, given the company’s high visibility in its earnings.
The forward PE multiple is calculated by dividing the company’s current share price by its forecast EPS (earnings per share) for the next 12 months. Remember, valuation multiples help investors make important investment decisions because such metrics are driven by perceived growth, investors’ willingness to pay, and risks and uncertainties.
PM’s PE multiple
As of April 11, 2017, Philip Morris was trading at a forward PE multiple of 22.6x, as compared to 20.8x before the announcement of its 4Q16 earnings. Its better-than-expected 4Q16 earnings and optimistic 2017 outlook appear to have increased investor confidence, leading to the rise in its stock price, which, in turn, has raised its PE multiple.
On the same day, peers Altria Group (MO and Reynolds American (RAI) were trading at PE multiples of 21.2x and 24.1x, respectively.
After seeing a positive response from customers for iQOS in the 20 markets where the product has been launched, the company plans to expand the product to 30–35 markets by the end of 2017. The company is also investing heavily to increase its HeatStick production capacity to 50 billion from the current capacity of 15 billion.
If the product fails to generate expected sales, the increased expense is expected to put pressure on the company’s margins, thus lowering its EPS.
For 2017, analysts are expecting PM to post EPS growth of 9.4%, but the company’s current stock price might have factored in this earnings growth. If the company’s earnings come in lower, its stock price could decline, lowering its PE multiple.
You can mitigate these company-specific risks by investing in ETFs such as the iShares Select Dividend ETF (DVY), which has invested 3.4% of its holdings in cigarette and tobacco companies.
In the next and final part, we’ll look at analysts’ recommendations and target price for next 12-months.