Are Philip Morris’s Numbers Attractive in 2020?

As of March 10, Philip Morris International (NYSE:PM) was trading at $84.73—a fall of 0.4% since the beginning of this year. Despite the fall, the company has outperformed the broader equity market and its peers. During the same period, the S&P 500 Index has fallen by 10.8%, while Altria Group (NYSE:MO) has fallen by 15.5%. The weakness in the broader equity market is due to the coronavirus outbreak and the slump in oil prices. Notably, the weakness has dragged the stock down. However, the company’s impressive fourth-quarter performance has mitigated most of the decline. For more on Philip Morris’s fourth-quarter performance, read Philip Morris Beats Analysts’ Top and Bottom-Line Estimates. First, we’ll look at analysts’ expectations and management’s guidance for 2020.

Analysts’ revenue expectations for Philip Morris

For 2020, analysts expect Philip Morris to report revenue of $31.14 billion—a rise of 4.5% from $29.81 billion in 2019. I expect the growth in RRP (reduced risk products) sales and favorable pricing to drive the company’s revenue.

By the end of 2019, the company introduced iQOS in 52 markets, which represents 44% of the total international markets. Late in 2019, the company introduced iQOS 3 DUO, which offers a more premium and modern design product with a rapid charge battery. Philip Morris is also working to develop innovative products under the iQOS platform. The company estimates that 14 million people use iQOS. Among these people, nearly 71% or 10 million stopped smoking and shifted entirely to iQOS. In partnership with Altria Group, the company has launched iQOS in two lead markets in the US. Also, Philip Morris plans to submit a supplemental PMTA (Premarket Tobacco Product Applications) application for its iQOS 3 in the US.

Philip Morris’s management also plans to introduce its e-vapor product IQOS MESH 2.0 this year. Management delayed the launch due to confusion surrounding e-vapor products. Also, the company signed an agreement with KT&G, a Korean tobacco and nicotine company, to market its smoke-free products in international markets.

For 2020, Philip Morris’s management expects its total shipment of cigarettes and heated tobacco units to fall by 2.5% to 3.5%. Increased taxes in Indonesia, a ban on menthol cigarettes in Europe starting in May 2020, and an industry-wide decline of 1%–2% in the cigarette volume could lower the company’s cigarette shipments. The decline in Philip Morris’s total shipment volumes could offset some of the revenue growth.

EPS could rise in 2020

Philip Morris’s management has set its 2020 EPS guidance at $5.50—6% growth from $5.13 in 2019. Analysts expect the company’s adjusted EPS to rise by 7.4% to $5.58 in this year. The revenue growth, increased EBITDA margin, and lower D&A  expenses could drive the company’s EPS. Meanwhile, higher interest expenses could offset some of the gains.

For 2020, analysts expect the company’s EBITDA margin to improve from 42.7% in 2019 to 43.4%. The decline in SG&A expenses due to improved cost efficiencies could drive Philip Morris’s EBITDA. For 2020, the company’s management expects its effective tax rate to be 23%, which represents a marginal fall from 23.2% in 2019.

Dividend yield

On March 5, Philip Morris’s board announced quarterly dividends of $1.17 per share with an annualized payout rate of $4.68 per share. The company will pay dividends on April 9 to shareholders on record as of March 23. As of Tuesday, the company’s dividend yield was 5.52%, while its stock price was trading at $84.73. On the same day, Altria Group’s dividend yield was 8.0%.

Philip Morris’s valuation multiple

As of Tuesday, Philip Morris’s forward PE ratio was 15.0x—a fall from 15.3x at the beginning of 2020. The strong fourth-quarter earnings led analysts’ to raise their EPS estimates, which could have lowered the company’s valuation multiple. Meanwhile, Altria was trading at a forward PE ratio of 9.4x on the same day.

As of Tuesday, Philip Morris was trading at 15.2x analysts’ 2020 EPS estimate of $5.58 and at 14.0x analysts’ 2021 EPS estimate of $6.06. Their EPS estimates represent a YoY growth of 7.4% in 2020 and 8.7% in 2021.

Analysts’ recommendations

Wall Street favors a “buy” rating for Philip Morris. Among the 17 analysts, 11 recommend a “buy,” five recommend a “hold,” and one recommends a “sell.” As of Tuesday, analysts’ consensus target price was $96.60 with a 12-month return potential of 14.0%. Following Philip Morris’s fourth-quarter earnings, Cowen and Company upgraded the stock from “market perform” to “outperform.” Cowen also raised its target price from $90 to $102. On March 3, Piper Sandler cut its 12-month target price from $114 to $112.

My take on Philip Morris

I expect Philip Morris to keep outperforming its peers and the broader equity market this year. I think that the introduction of iQOS in the US and other markets could drive the company’s sales. Also, I’m optimistic about the development of innovative products under the iQOS platform and the introduction of e-vapor product IQOS MESH 2.0. However, weakness in the broader equity market could put pressure on the company’s stock price in the near term. Read Should You Consider Buying Altria Group? to learn more.