Philip Morris International's (PM 1.56%) stock price rose 4% on July 21 after the tobacco giant posted its second-quarter earnings report. Its revenue rose 3% year over year to $7.83 billion, which beat analysts' estimates by $1.07 billion. On a pro forma adjusted basis, which excludes Russia and Ukraine from both periods, its revenue increased 6%.
The adjusted earnings for Philip Morris International (PMI) fell 6% to $1.48 per share, mainly due to a $0.16-per-share impact from currency headwinds, but still exceeded analysts' expectations by $0.23. On a pro forma constant currency basis, its adjusted earnings would have increased 6%.
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Those numbers were a bit messy, but PMI's core business still seems fairly stable. Should investors buy it as a safe haven play in this bear market?
Understanding PMI's business
PMI was spun off from Altria (MO 0.65%) in 2008. After that separation, PMI only operated in overseas markets, while Altria remained in the U.S. That spin-off was a double-edged sword for PMI -- the company was able to expand more freely into higher-growth overseas markets, but it was also exposed to unpredictable currency headwinds and shifting regulations.
Like Altria, PMI raises its prices and cuts costs to offset declining smoking rates. PMI also resumed its buybacks last year to wring out some higher earnings per share from its slower revenue growth.
To diversify its business beyond its flagship Marlboro brand and other traditional cigarettes, PMI launched its IQOS heated tobacco devices in 2014. These electronic devices heat up sticks of tobacco instead of burning them, and it promotes them as alternatives to cigarettes and e-cigarettes.
PMI now relies on IQOS for most of its growth. As this chart illustrates, the growth of PMI's heated tobacco business has consistently offset its sluggish shipments of traditional cigarettes in recent years.
|
Period |
2019 |
2020 |
2021 |
1H 2022 |
|---|---|---|---|---|
|
Cigarette Shipments Growth* |
(4.5%) |
(7.9%) |
(0.6%) |
1.4% |
|
Heated Tobacco Shipments Growth |
44.2% |
27.6% |
24.8% |
19.7%** |
|
Total (Cigarette and Heated Tobacco) Shipments Growth |
(2%) |
(8.1%) |
2.2% |
4%** |
|
Organic Revenue Growth* |
6.4% |
(1.6%) |
7.6% |
8.1%** |
Data source: PMI. *Like-for-like basis. **Pro forma adjusted basis.
For the full year, PMI expects its heated tobacco shipments to increase 22%-25% and for its total shipments to rise 1.5%-2.5%. It also expects its adjusted revenue to improve 6%-8% organically. All those estimates were made on a pro forma basis.
Inflationary headwinds and peaking margins
PMI's price hikes, cost-cutting measures, and the ongoing expansion of its IQOS business enabled it to expand its operating margins through 2021. But this year its operating margins have been squeezed by inflation, supply chain disruptions, and higher prices for IQOS components. It also continues to ramp up its investments in developing and marketing new heated tobacco products.
|
Period |
2019 |
2020 |
2021 |
1H 2022 |
|---|---|---|---|---|
|
Adjusted Operating Margin |
39.5% |
40.8% |
42.6% |
42.4% |
|
Adjusted EPS Growth* |
9.9% |
7% |
15.3% |
10.4% |
Data source: PMI. *Constant currency, organic basis.
On a pro forma constant currency basis, PMI expects its adjusted EPS to increase 10%-12% for the full year. But if we include Russia and Ukraine, it expects its adjusted EPS to decline 3%-6%.
A low valuation and a high dividend
PMI faces some near-term macroeconomic headwinds, but its stock still looks fairly cheap at 16 times forward earnings, and it pays a hefty forward dividend yield of 5.5%. It's also raised that payout annually ever since it parted ways with Altria.
Altria trades at just nine times forward earnings and pays a much higher forward yield of 8.5%, but it faces tougher challenges in the U.S. as Juul's e-cigarettes face a nationwide ban.
PMI's stock won't blast off anytime soon, but its predictable growth, high dividend, and low valuation could all make it a solid consumer staples stock to hold during an economic downturn.
