We are raising Philip Morris International (PM) to a Best Idea Long. The company’s pricing power, visibility in organic volume growth, and mid-teens shareholder return formula from a combination of EPS growth and dividend, all at an attractive valuation, offer a compelling proposition for long-duration portfolios. Prospects for a weaker U.S. dollar, lower interest rates, and a classic bearish to bullish phase transition would be further tailwinds.
On Friday, March 22 at 2 PM, we will present our Black Book deep dive into Philip Morris. We will examine the growth prospects for the company’s non-combustible portfolio, stress test the combustible business, evaluate the company’s ability to take price, detail the volume drivers, assess the expected returns, and more.
The non-combustible portfolio reaching a tipping point for the company’s profitability and growth will trigger the re-rating. We see the potential for the shares to deliver a 25% compounded annual return from EPS growth, multiple expansion, dividends, and deleveraging. That would lead to shares doubling over a multi-year duration in most economic scenarios.
Event Details:
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Three consecutive years of HSD% organic revenue growth with positive volumes ranks among the best in class in Consumer Staples. Yet Philip Morris International trades at a modest 15x PE and offers a 5.5% dividend yield. Tobacco’s health and regulatory/legal risks keep investors at bay.
Humans have been using tobacco for thousands of years. Nicotine is one of the most addictive drugs. Cigarette smoking is also the leading cause of preventable disease in many countries. Philip Morris’ strategy is to move away from tobacco smoke and its health risks towards nicotine and its habit-forming usage. The company’s smoke-free products now represent nearly 40% of revenue. Driving that change is Zyn, a nicotine oral pouch that is among the fastest-growing consumer brands, with 60% volume growth in the U.S. in 2023, accelerating above 75% in Q4. By the end of the decade, smoke-free products project to represent 2/3 of the company’s top line. Before then, investors will be focused on how fast the company can grow rather than on the rate of shrinking industry volumes.