Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Here's My Top Value Stock to Buy Right Now

By Will Ebiefung - Dec 5, 2020 at 10:09AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Phillip Morris International has massive potential, but the stock trades at a shockingly low price.

Value stocks are shares in companies that trade at low multiples relative to their earnings and growth potential. They are an excellent way for investors to minimize the risks associated with growth stocks that have high expectations built into their valuations. Let's dig a little deeper to find out why tobacco giant Philip Morris International ( PM 1.75% ) is one of the best value stocks to buy right now. 

Arrow made of hundred dollar bill stuck in dartboard

Image source: Getty Images.

Pivoting to reduced-risk products

U.S. smoking rates peaked in the 1960s before declining sharply as more information about the negative health implications became available. (Smoking rates are still growing in some international markets, though.) Philip Morris has turned this secular challenge into an opportunity by pivoting to "reduced-risk" products like IQOS, a system that heats tobacco without burning it. This reduces the release of harmful chemicals relative to cigarettes, according to company research.  

There is still debate about the safety of heated tobacco systems compared to their combustible counterparts. But the U.S. Food and Drug Administration (FDA) has authorized Philip Morris to market IQOS as a modified risk tobacco product. Regulators elsewhere in the world have also approved IQOS, helping to boost sales of the product. 

Philip Morris sold almost 19 billion heated tobacco units (HTUs), including IQOS, in the third quarter: 18.7% more than in the prior-year period. Sales of the new products helped offset declines in traditional cigarette volume, which fell 9.8% to roughly 165 billion units. Cigarettes still make up the majority of Philip Morris' product mix, but HTUs now comprise over 10% of total volume, up from less than 1% in 2016. Reduced-risk products in general (including vaporizers) represent 23% of revenue. 

A dirt cheap valuation 

Philip Morris' net revenue fell by 2.6% to $7.4 billion in the third-quarter, but management expects net revenue and adjusted diluted earnings per share to expand at compound annual growth rates (CAGRs) of at least 5% and 8%, respectively, once COVID-19-related economic headwinds abate. 

Cigarettes wrapped in hundred dollar bill

Image source: Getty Images.

The company is guiding for full-year diluted EPS of $5.03 to $5.08 for 2020. This would give the stock a price-to-earnings (P/E) multiple of roughly 16 at the time of writing. That P/E multiple is dramatically lower than the S&P 500 average of 37. And Philip Morris looks attractively valued considering the company's potential for price hikes and long-term organic growth through reduced-risk products. 

Why this matters for investors

Philip Morris' dirt cheap valuation and potential for future earnings growth allow the company to pay a large dividend. Investors receive an annualized $4.80 per share, which is a yield of 5.94%. That's not too shabby, considering the S&P 500's average dividend yield is just 1.59%.

Philip Morris' payout ratio of roughly 95% of EPS shows that management is committed to returning practically all of the company's profits to shareholders. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$89.38 (1.75%) $1.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.