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Valuation Multiples: Philip Morris versus Altria Group

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Valuation multiple

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

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PM’s forward PE multiple

The lower-than-expected 3Q17 earnings and lowering of 2017 EPS guidance have led Philip Morris’s stock price and PE multiple to fall. As of January 30, the company was trading at a forward PE multiple of 20.4x, compared to 21.2x before the announcement of its 3Q17 earnings. On the same day, Altria Group (MO) was trading at a forward PE multiple of 18.0x.

On July 28, 2017, the FDA announced that it’s planning to reduce nicotine in US cigarettes to non-addictive levels. This plan pressured Altria Group’s stock price, since it markets its products in the United States. However, the announcement didn’t have a significant impact on Philip Morris’s stock price, as the company markets its product outside the United States. So Philip Morris is trading at a higher valuation multiple than Altria Group.

Growth prospects

To meet customers’ ever-changing needs and support their health, Philip Morris is working on developing four RRP (reduced-risk product) platforms. The first, iQOS, has been introduced to 31 markets and generated 13.0% of the company’s revenue. However, the other three platforms are in various stages of testing. If these products fail to generate the expected sales, the expenditure incurred could pressure the company’s earnings.

For the next four quarters, analysts expect Philip Morris’s EPS to rise 16.3% in the next four quarters, which could have been factored into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.

Next in this series, we’ll look at analysts’ recommendations.

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