On Oct. 21, Philip Morris International (PM 2.19%) released its latest quarterly earnings. While the tobacco giant reported "beat and raise" results for the second quarter in a row, updates to guidance fell short of Wall Street's expectations.
Shares have pulled back, albeit to a lesser degree than what occurred when the company last reported quarterly results back in July. Although the stock may be finding support as investors buy the dip, the question now is whether another issue will impact Philip Morris International's ability to hit its previous high, much less soar to new peaks.
NYSE: PM
Key Data Points
So what's the issue? It appears the market remains hesitant to value this "sin stock" at a valuation that's on par with other blue chip consumer staples stocks. That said, there may be a path for this to eventually happen.
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Philip Morris International's post-earnings slide
For the quarter ended Sept. 30, Philip Morris International's revenue and earnings beat analysts' expectations. Organic revenue increased 5.9% year over year, while adjusted earnings per share climbed 17.3%. The main growth driver for the company continues to be its "smoke-free business."
Compared to its "big tobacco" peers, Philip Morris International, or PMI, has been more aggressive in pivoting away from traditional cigarettes. The company's "smoke-free" products include its Iqos heated tobacco device, as well as its Zyn line of nicotine pouches. Together, products from the smoke-free category now make up 41% of PMI's overall revenue.
As a result, PMI has been able to report higher rates of growth than its competitors too, including former corporate parent Altria Group. Yet while it may be growing faster than its peers and above management's guidance, this wasn't enough to impress Wall Street.
For full-year 2025, PMI's guidance calls for adjusted earnings per share (EPS) between $7.46 and $7.56, a slight increase from the previous range of $7.43 to $7.56. Investors, however, were expecting a more substantial upward revision.
Breaking through the "sin stock ceiling"
Investors were not impressed with PMI's latest earnings outlook, but not only is it quite impressive for a tobacco company, it's quite impressive compared to other blue chip consumer staples stocks as well.
The company has reported five straight quarters of double-digit adjusted earnings growth with an average of 15.7% in that period. For 2025, PMI is on track to report earnings growth of 13% to 15%. Meanwhile, another blue chip consumer staples stock, The Hershey Company, has reported a similar earnings growth rate of 15.4% over the past five years. However, Hershey trades at a forward earnings multiple of just over 30, while PMI trades for less than 20 times forward earnings. That gap exists despite the fact Hershey has reported declining earnings through the first half of 2025.
I attribute much of that gap to PMI's "sin stock" status. It may be positioning itself as a next-generation "smoke-free" tobacco company, but for now, investors continue to discount its shares. While frustrating, this may present an opportunity for long-term investors, given the potential for this discount to dissipate over time.
Should you buy Philip Morris International?
So far this year, the regulatory environment for "reduced harm" tobacco products in the U.S. has become more favorable. Just recently, the U.S. Food and Drug Administration announced it would fast-track regulatory reviews of nicotine pouches.
Meanwhile, user adoption of nicotine pouches, primarily by current or former smokers, keeps growing. While only a single-digit percentage of Americans currently use nicotine pouches, more than 10% of the U.S. population still smokes cigarettes. This suggests a long growth runway remains for products like Zyn.
At the same time, since Philip Morris International only sells cigarettes outside the U.S., Zyn's continued rise will not cannibalize its legacy business, an issue companies like Altria may have to contend with. Over time, positive regulatory and user adoption trends could help convince investors that this stock is worthy of a higher valuation.
Combine this potential for valuation expansion with the prospect of continued earnings growth, and PMI could deliver outsized gains for years to come. This makes the stock an attractive opportunity at current prices.
