Where Will Philip Morris International Stock Be in 1 Year?

Philip Morris International (PM -0.83%) posted its fourth-quarter earnings report on Feb. 9. The tobacco giant's revenue rose by 0.6% year over year to $8.15 billion but beat analysts' expectations by $610 million. Its adjusted EPS grew 1.5% to $1.39 and cleared the consensus forecast by $0.11.

Those growth rates seem anemic, but most investors likely own PMI for its stability and dividends instead of aggressive gains. That's why its shares held up fairly well over the past 12 months, when they dipped less than 2% against the S&P 500's decline of nearly 10%. But will PMI continue to outperform the market through the end of 2023?

Image source: Getty Images.

Pivoting away from traditional cigarettes

PMI is based in the U.S. but generates nearly all of its revenue overseas. It was previously Altria's (MO 0.28%) international division prior to its spin-off as an stand-alone company in 2008. It still shares many of the same cigarette brands, including Marlboro, with its former parent company.

PMI was initially spun off to focus on higher-growth overseas markets as Altria's domestic market sank into a secular decline. But over the past decade overseas smoking rates have also withered. At first, PMI raised its prices, cut costs, and bought back shares to counter that pressure.

But eventually PMI realized those strategies were unsustainable over the long term. That's why it launched its iQOS heated tobacco products, which heat up sticks of tobacco instead of burning them, in late 2014 as alternative smoking products. 

Since then PMI has aggressively expanded its heated tobacco business to reduce its long-term dependence on traditional cigarettes. It runs this business on a razor-and-blades model, in which it sells the iQOS devices at low margins to support its sales of higher-margin branded and licensed heat sticks.

Those heated tobacco products accounted for 15% of PMI's total shipments in 2022, compared to just 8% of its shipments back in 2019. As the following table illustrates, the rapid growth of PMI's heated tobacco business largely offset its declining shipments of cigarettes over the past four years:

Data source: PMI.

In 2022, PMI's reported growth was severely impacted by the Russo-Ukrainian war. Excluding Russia and Ukraine, its total shipments would have risen 3.2% for the full year, driven by a 0.8% increase in cigarette shipments and its 21.5% growth in heated tobacco shipments.

In addition, PMI faced inflationary headwinds, which squeezed its margins while curbing discretionary spending on tobacco products, and supply chain disruptions, which throttled its production of iQOS devices.

What are PMI's plans for 2023 and beyond?

But despite all those challenges, PMI still expects its adjusted EPS to increase 7% to 9% in constant-currency terms in 2023, which easily beats the consensus forecast for flat growth. It believes its ongoing transition toward smokeless products -- which will be accelerated by its recent acquisition of Swedish Match (a maker of snus, snuff, nicotine pouches, and cigars) -- will drive that growth as the macroeconomic environment improves.

In 2024, PMI will also regain full control of iQOS in the U.S. market. It previously allowed Altria to sell those products domestically, but it's in the process of buying out Altria's rights to that partnership for $2.7 billion. That massive deal will bring PMI back to the U.S. and support the global expansion of its heated tobacco business.

During the conference call, CEO Jacek Olczak called the Swedish Match and iOOS deals its "two critical strategic milestones" toward becoming a smoke-free company. Olczak also pointed out that "smoke-free net revenues reached almost one third" of PMI's total revenue in 2022, and accounted for "over 50%" of its revenue across 17 markets.

PMI should remain a good defensive play

PMI is arguably in better shape than Altria, which has struggled in fits and starts to expand beyond cigarettes. At $100 per share, PMI still trades at 15 times its adjusted EPS forecast for 2023, and it pays a forward dividend yield of nearly 5%.

That low valuation and high yield should limit its downside potential as the bear market drags on. But if a new bull market starts this year, it could be left behind as investors pivot toward higher-growth plays again. In short, I believe PMI's stock will hold steady over the next 12 months -- but I'm not convinced it will soundly outperform the market as it did in 2022.