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Is Philip Morris Stock a Buy?

By Dan Caplinger – May 28, 2020 at 7:27AM

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The tobacco company has been going through a big transformation, but investors are still nervous.

When the stock market gets turbulent, investors often turn to companies that specialize in consumer staples. Demand for the items that millions of people need regularly tends to hold up well even under economic stress, and that's held especially true during the coronavirus pandemic.

Tobacco companies aren't quite immune to economic impacts, though, and Philip Morris International (PM -1.81%) hasn't held up nearly as well as some companies in the food and household products categories. For Philip Morris, a long transition away from traditional cigarettes toward reduced-risk alternatives has taken investors for a bumpy ride, but the company remains hopeful that its long-term strategy remains sound. Let's look more closely at the tobacco giant to see if Philip Morris stock is a good buy.

PM Chart

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Where Philip Morris is headed

Philip Morris shocked the investing community when it announced several years ago that it saw itself completely phasing out sales of traditional cigarettes in the long run. With tobacco companies having had to admit the adverse health impacts from cigarette smoking, Philip Morris decided that it was untenable to rely on a decaying business. Instead, it ramped up spending on research and development into alternatives that could give customers the experience they wanted while offering at least some protection from ill effects on their health.

So far, the biggest achievement for Philip Morris on the reduced-risk front has been the IQOS heated-tobacco system. IQOS takes specially formulated tobacco and heats it to a lower temperature than would be required for combustion. The resulting vapor offers some of the same taste characteristics as traditional cigarettes, but avoiding outright burning reduces some of the harmful chemicals that result from regular smoking. The biggest market for IQOS so far has been Japan, but Philip Morris has rolled out the heated-tobacco system in other countries around the world as well.

Two hands holding an IQOS device over a lab table with some storage boxes on it.

Image source: Philip Morris International.

Dealing with coronavirus pressures

Even before the coronavirus pandemic struck, Philip Morris International's stock had gone through some tough times. A strong U.S. dollar hurt the company's growth, as the foreign currency it collects from its international sales were worth fewer dollars. Philip Morris stock wasn't able to avoid the broad-based downdraft in early 2020, sending its shares downward along with much of the stock market.

Yet from a fundamental perspective, Philip Morris has actually held up reasonably well. The tobacco giant's first-quarter financial results included a 6% rise in revenue net of excise tax and a 35% jump in net income. Even after accounting for some favorable one-time impacts, adjusted earnings per share rose 11% year over year. Strength in sales growth rates of IQOS systems were able to offset most of the declines in traditional cigarette sales, which kept falling in line with its long-term trends.

Admittedly, it won't be until the second quarter that investors get a full look at how government restrictions related to the pandemic will have on the tobacco company. Philip Morris is ready to see IQOS adoption slow somewhat, and the portion of sales that the company gets from duty-free shops has already dropped markedly.

Interestingly, Philip Morris is working on a possible vaccine against COVID-19. Along with other industry players, Philip Morris hopes that innovative biotech solutions involving plants could be the answer to beating the spread of COVID-19 around the world. Few expect Philip Morris to be first to the finish line with a coronavirus vaccine, but it still shows the power of the tobacco company's expertise in biotechnology.

A track record of toughness

Philip Morris has faced difficult conditions in the past, and it's always found a way to make it through. Whether it's tobacco litigation in the 1990s and early 2000s or a combination of regulatory pressure and consumer advocacy efforts more recently, Philip Morris has stayed a step ahead, defying naysayers. With a depressed share price, the stock currently yields 6.5% -- toward the upper end of its historical range.

With signs of a potential global economic recession ahead, Philip Morris will have to pull out its playbook and use its time-honored strategies to balance affordability and pricing power. But the tobacco stock has done so successfully before, and there's no reason to think Philip Morris won't be able to do so again. For those with a long-term time horizon who can weather the likely volatility to come, Philip Morris has a lot going for it -- and will pay you while you wait for better times ahead.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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$87.29 (-1.81%) $-1.61

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