Weak 2Q17 Earnings Lower Philip Morris’s Valuation Multiple

Valuation multiple

Due to high visibility in Philip Morris International’s (PM) earnings, we’re using the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimates for the next four quarters.

Weak 2Q17 Earnings Lower Philip Morris’s Valuation Multiple

PM’s forward PE multiple

The lower-than-expected 2Q17 earnings and the lowered 2017 EPS guidance by Philip Morris’s management led to a decline in the company’s stock price and its forward PE multiple.

On July 24, 2017, Philip Morris was trading at 23.0x compared to 23.3x before the announcement of its 2Q17 earnings. Comparatively, its peers Reynolds American (RAI) and Altria Group (MO) were trading at 24.7x and 21.2x, respectively, on the same day.

Growth prospects

After getting a positive response for its IQOS product, Philip Morris is focusing on expanding the availability of the product to 30–35 markets by the end of 2017. Also, the company is investing $1.6 billion to increase its HeatSticks manufacturing capacity to 50 billion units from its current capacity of 15 billion units by the end of 2017.

In Japan, Philip Morris has introduced two new variants of HeatSticks: the smooth taste and differentiated menthol-based segment. These initiatives are expected to increase Philip Morris’s expenses. If these initiatives fail to generate the expected sales, the increased expenditures could put pressure on Philip Morris’s margins, lowering its earnings.

For the next four quarters, analysts expect the company to post EPS (earnings per share) growth of 15.2%, which could have already been factored into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could lower Philip Morris’s stock price and its valuation multiple.

In the final part of this series, we’ll look at analysts’ recommendations for Philip Morris.