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Why Philip Morris Looks Attractive at These Levels

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So far this year, Philip Morris (NYSE:PM) has lost 17.0% of its stock value. The stock has underperformed the broader equity markets. The S&P 500 Index has declined by just 1.6% during the same period. Although Phillip Morris reported an impressive first-quarter performance, the stock fell due to management’s weak guidance for the second quarter and the expectation of a delay in the expansion of IQOS, a heated-tobacco unit, due to the pandemic.

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Following the first-quarter earnings, Philip Morris’s management withdrew its guidance for 2020. Management gave its guidance for the second quarter, which was weaker than analysts’ expectations. Management expects the delay in the implementation of minimum price enforcement in Indonesia and disruptions caused by the pandemic to impact its second-quarter numbers.

However, I think that these setbacks will be short-lived. On June 30, Bloomberg reported that Philip Morris CEO Andre Calantzopoulos expects cigarettes to become obsolete within 10–15 years. He expects people to move towards smoke-free products. Through IQOS, Philip Morris leads the market in smoking alternatives. The company has targeted to shift 40 million smokers to smoke-free products by 2025. Meanwhile, the company estimated that 10.6 million people have completely quit smoking and shifted to IQOS as of March 31.

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Philip Morris claims that IQOS is less harmful than cigarettes. However, some health groups are concerned about the claims. The FDA has allowed IQOS sales in the US. However, the FDA hasn’t allowed the product to be marketed as less risky than cigarettes. 

Analysts’ expectations for Philip Morris

Analysts expect Philip Morris to report revenues of $28.7 billion in 2020, which represents a fall of 3.8% from the previous year’s revenue. They also expect the company’s EPS to decline by 5.5% to $4.90 in 2020. Lower sales could drag the company’s EPS down. However, analysts expect the company’s sales to rise by 6.4% in 2021 to $30.5 billion. The sales growth and expanded EBIT margin could drive the company’s EPS to $5.41. The amount represents year-over-year growth of 10.4%.

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Dividend yield and valuation multiples

On June 5, Philip Morris’s board announced quarterly dividends of $1.17 per share, which will be paid on July 10 to shareholders on record as of June 22. As of July 6, the company’s dividend yield was 6.63%. On the same day, Altria Group’s (NYSE:MO) dividend yield was 8.48%.

As of Monday, Philip Morris was trading at a forward PE ratio of 13.7x. The ratio was cheaper than its average PE ratio of 16.4x for the past three years. The decline in the company’s stock price led to a fall in the company’s valuation multiple. On the same day, Altria was trading at a forward PE ratio of 9.04x. 

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Analysts’ recommendations and my take on Philip Morris

Wall Street is bullish on Philip Morris. Among the 17 analysts, 76.5% recommend a “buy,” while 23.5% recommend a “hold.” None of the analysts recommend a “sell.” As of July 7, analysts’ consensus target price was $83.73, which represents a 12-month return potential of 18.6%. On June 11, Cowen raised its target price from $85 to $89.

Given the growth prospects, high dividend yield, and cheaper valuation multiple, I’m bullish on Philip Morris. Meanwhile, the company has seen a decline in interest among hedge funds. Recently, Insider Monkey reported that 48 hedge funds had Philip Morris in their portfolios at the end of March compared to 57 hedge funds at the end of the last quarter. 

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