Philip Morris International Conquers The Ever-Changing World

seekingalpha07-23

PM's smokeable portfolio is less susceptible to the trends underlying the cigarette volume declines.The Company delivered impressive growth of its smoke-free portfolio and is set to reach its 2030 ...

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MO's smokeable produ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","LU1506573853.SGD":"MANULIFE GF GLOBAL EQUITY \"AA\" (SGD) INC","BK4075":"烟草","JAPAF":"Japan Tobacco","BTI":"英美烟草","BK4566":"资本集团","GB00B4QBRK32.GBP":"FUNDSMITH EQUITY \"R\" (GBP) INC","SG9999011175.SGD":"Nikko AM Global Dividend Equity Dis SGD-H","GB00B4LPDJ14.GBP":"FUNDSMITH EQUITY \"R\" (GBP) ACC","LU1043141396.HKD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (HKD) ACC","LU1043141123.HKD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (HKD) INC 2","BK4588":"碎股","LU0661504455.SGD":"Blackrock Global Equity Income A5 SGD-H","LU0426412945.USD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USD) ACC","LU0426417589.USD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USD) INC","MO":"奥驰亚","LU1228905037.USD":"NINETY ONE GSF GLOBAL QUALITY DIVIDEND GROWTH \"A\" (USD) ACC","LU0994945656.USD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USD) INC 2","LU2404859741.USD":"FUNDSMITH EQUITY FUND \"R\" (USD) INC","LU0949170772.SGD":"Blackrock Global Equity Income A6 SGD-H","LU1121112475.USD":"NINETY ONE GSF GLOBAL FRANCHISE \"A\" (USDHDG) ACC","LU2404859667.USD":"FUNDSMITH EQUITY FUND \"R\" (USD) ACC","LU0690374961.EUR":"FUNDSMITH EQUITY \"R\" (EUR) INC","LU0314106906.USD":"MANULIFE GF GLOBAL EQUITY \"AA\" (USD) INC","LU0690374615.EUR":"FUNDSMITH EQUITY \"R\" (EUR) ACC","SG9999001440.SGD":"United Global Dividend Equity Fund A SGD Dist","LU0738911758.USD":"Blackrock Global Equity Income A6 USD","LU0545562505.USD":"NINETY ONE GSF GLOBAL QUALITY DIVIDEND GROWTH \"A\" (USD) INC","SG9999003800.SGD":"Nikko AM Global Dividend Equity Acc SGD-H","PM":"菲利普莫里斯","LU1228905540.USD":"NINETY ONE GSF GLOBAL QUALITY DIVIDEND GROWTH \"A\" (USD) INC 2"},"translate_title":"菲利普莫里斯国际公司征服不断变化的世界","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BTI":1,"PM":1,"MO":1,"JAPAF":1},"content_text":"PM's smokeable portfolio is less susceptible to the trends underlying the cigarette volume declines.The Company delivered impressive growth of its smoke-free portfolio and is set to reach its 2030 Vision.I don't see a strong upside through multiple appreciation in the short term. However, PM's long-term owners are highly likely to benefit greatly.   Urupong Investment Thesis For transparency, I own a certain stake in Altria Group (MO), which I often refer to within this analysis. I am a happy holder. Currently, I am not selling or buying. On the other hand, I don't own Philip Morris International (NYSE:PM), but after reviewing its business, I consider adding it to my portfolio, even though its valuation multiple significantly exceeds MO's multiple. Considering PM's:  impressive and ongoing progress towards the non-smokeable product portfolio decent adj. diluted EPS growth well-covered dividends exposure to markets less susceptible to the trends underlying the cigarette volume declines leading brands with ever-growing market share dynamic expansion of its smoke-free product portfolio significant growth potential through IQOS commercialization in the US  I consider PM a worthy addition to the well-structured portfolio. Even though we may witness some share price volatility, long-term-oriented investors will do well through investing in PM. I am bullish on Philip Morris International. Introduction As change is the only constant in our world, the best companies show capabilities in adapting to the shifting market conditions. Without such flexibility, businesses cannot uphold their competitive edge and eventually lose their market share as years go by. PM operates within a broad tobacco industry, which has been facing headwinds related to the secular changes in terms of social norms regarding smoking and rising health awareness, which resulted in declining (in some markets) cigarette volumes. That's been especially evident when looking at another industry representative operating in the US - Altria Group, which has been facing cigarette volume declines for a long time, and during Q1 2024, the negative volume effect exceeded the positive price/mix effect. Moreover, MO still has a long way to go while navigating the industry's negative trends. However, PM's situation is very different due to two main reasons:  its key markets have better prospects regarding the traditional smokeable products it's been successfully navigating the shift toward a non-smokeable product portfolio  As a result, PM's valuation has significantly exceeded that of its peers. Even after the recent stock price increases (13.9% YTD), this business is still worth considering as an addition to a well-structured portfolio. Enjoy the read! Data by YCharts PM's Business Is Strong - Here's Why #1 PM's Key Markets are Less Susceptible to the Market Shift For context, let's look at the key US player - MO, and its smokeable product volume performance during recent years. MO's smokeable product volumes have declined at a compound annual rate of 6.9% during the 2019-2023 period (with 2018 as a base year). It declined further in Q1 2024 by 9.9% on a year-over-year basis. At the same time, PM's total cigarette volumes have declined at a compound annual rate of 3.7%, with a further decline of 0.4% on a year-over-year basis in Q1 2024. What is the reason for such a noticeable difference? Geography and the trends underlying each market. PMI's cigarettes are offered in ~175 markets. In Q1 2024, among the key cigarette markets of PM were, inter alia:  Indonesia Turkey Russia European countries (e.g. Germany, Italy, France, Poland, and Spain)  Among the key regions distinguished by PM are Europe, SSEA, CIS, and MEA. Each of these regions has more positive smokeable tobacco market prospects when compared to the US as the volume declines to proceed at a considerably slower pace. While this may change in the future (it probably will), PM has more time to establish itself as a non-smoke leader within its geographies. US-oriented leader MO doesn't have as much time - it's already experienced total net revenue declines in 2022 and 2023. On the other hand, PM managed to grow its net revenue derived from the combustible tobacco segment by 3.5% in Q1 2024 (vs Q1 2023) by offsetting the negative volume effect with a net positive combination of other effects (price/mix/currency). #2 PM is successfully navigating the movement beyond smoking As implied earlier, PM has much more time before its smokeable products portfolio becomes a burning issue. The Company's strength doesn't end there. PM has made outstanding progress in developing its smoke-free portfolio. The revenue of this segment amounted to nearly $3.4B, constituting 38.5% of PM's total revenue in Q1 2024. With growth recorded both within a smokeable segment and a smoke-free segment, PM continues to grow its revenue. In Q1 2024, the Company recorded (overall) positive price and volume/mix effects, which were the driving forces for a 9.7% revenue growth in Q1 2024 (vs Q1 2023), partially offset by the currency fluctuations. PM's Q1 2024 10-Q  Author based on PM's Q1 2024 10-Q The above data indicates a continuation of PM's efforts to continually increase its smoke-free presence. The Company intends to bring the share of its smoke-free product sales to at least 2/3 of total net revenue by 2030. Considering the current state (38.5% in Q1 2024 or 36.4% in 2023), the impressive progress PM has achieved since 2015 (0.7%), and the long-term trends accompanying the broad tobacco industry; I believe the Enterprise is more than capable of reaching its 2030 vision. PM's Investor Presentation PM has seen dynamic user growth regarding its leading smoke-free brand - IQOS. The brand recorded ~28.6m users in Q4 2024, a 3.7m upside from the level recorded in Q4 2022. Moreover, there's a significant upside to be realized once PM launches the commercialization of IQOS in the US. As a result of the Agreement with Altria Group, PM holds the rights to commercialize its brand in the US market.   PM's Q1 2024 10-Q On October 20, 2023, PM submitted applications to launch IQOS ILUMA to the US FDA. To quote the Company's comment from the press release:  Tens of millions of American adults today smoke cigarettes and will likely continue to do so. They should have a range of scientifically substantiated better alternative nicotine products to choose from, and PMI is committed to providing them with new choices. Internationally, IQOS ILUMA products have demonstrated how ground-breaking consumer-centric innovation can lead more adults to stop smoking. We believe that same success can be replicated in the U.S. and drive a rapid decrease in smoking rates among adults. These are strong applications, and we urge the FDA to prioritize them for review.  PM's Investor Presentation Financial Stance During the 2020 - 2023 period (with 2019 as a base year), PM recorded an adjusted diluted EPS CAGR of 4.0%. At the same time, the Company increased its dividend per share (DPS) at a compound annual growth rate of 2.7%. In 2024, PM announced two quarterly dividends of $1.30 per share each, and I believe it's likely to announce another dividend increase upon declaring the dividend for Q3 2024. The Company's 2024 guidance assumes a $6.25 adj. diluted EPS (at midpoint), consistent with its 4-year CAGR as it's supposed to beat the 2023 level by 4%. For reference, please refer to the chart below. Author based on PM PM has a strong balance sheet with ratings ranging from A- to A (depending on the agency). It's leveraged in terms of net debt to adj. EBITDA increased in 2022 and 2023 to 2.9x and 3.2x, respectively. The above increase resulted from the Swedish Match acquisition (90% ownership increased to 100% in November 2022 and February 2023, respectively) and payments for the previously mentioned IQOS commercialization rights. The Enterprise intends to deleverage the business and return to its ~2.0x net debt to adj. EBITDA ratio by the end of 2026. Given PM's profitability, pricing power, growing scale, credit metrics, and liquidity (supported by $6.2B of undrawn revolving credit facilities), I have no concerns regarding the Company's ability to uphold and further increase dividend payments.   PM's Investor Presentation Valuation Outlook As an M&A advisor, I usually rely on a multiple valuation method, a leading tool in transaction processes. This method allows for accessible and market-driven benchmarking. Numerous metrics are available for valuing a company, with EV/EBITDA being a rule of thumb for most sectors, especially mature ones. However, this method doesn't just involve gathering the metrics. Understanding the business-related rationale for a given multiple is crucial. Without that, analyzing the market data is futile. That said, the forward-looking EV/EBITDA stood at:   13.8x for PM  8.6x for MO  7.1x for British American Tobacco (BTI)  9.3x for Japan Tobacco (OTCPK:JAPAF)   PM is not cheap. It's not a deep value opportunity with a potential for 50-100% upside. I believe it's a relatively fairly valued business that continues to prove its ability to remain flexible and adjust to ever-changing market conditions. That's what constitutes a competitive edge and determines whether a given business will last. Therefore, even though we may witness some share price volatility along the way, long-term-oriented investors will do well through investing in PM. Regarding my current view on the valuation, we will likely see PM's stock price remain within 13.0x - 14.5x. Should the stock price fall below this range without any business-wise rationale, that would only constitute a stronger 'buy' for me. Summary Strengths & Opportunities  Ability to offset negative volume effect with pricing policy (supported by other effects, e.g. mix/currency). Impressive progress toward moving its portfolio to smoke-free products (~39% share of revenue) with still dynamic growth. Geographical diversification with exposure to markets less susceptible to the trends underlying the cigarette volume declines. High profitability. Decent adj. diluted EPS growth. Strong balance sheet. Reachable vision of exceeding 66% of revenue derived through smoke-free products by 2030. Strong brands with ever-enhancing market positions (e.g. IQOS, ZYN) across numerous markets with key (often leading) market positions. Significant growth potential through IQOS commercialization in the US. growing and well-covered dividends.  Weaknesses & Risk Factors  Relatively risky industry, susceptible to strict regulatory environment (differing within each market), ever-changing consumer preferences, competition, 'negative' trends underlying the (current) core of PM's portfolio. Should the high-interest rate environment prolong, PM may be forced to refinance at a higher cost. Relatively high valuation when compared to its peers. Nevertheless, I believe it to be justified based on the current state of PM's business and its progress towards the non-smokeable product segment. Relatively modest DPS growth.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2453770254"}