I've been wrong about Philip Morris International (PM +0.49%) for years. I avoided the stock on the premise that it wasn't a particularly safe ticker given the industry it operates in. But the company has adapted remarkably well, with a growing portfolio of products beyond traditional tobacco, and the numbers are becoming increasingly difficult to ignore.
The stock closed near $192 recently, and has delivered a 137% total return over the past five years, compared with 71% for the S&P 500. Here's what's changed about the company.
NYSE: PM
Key Data Points
What I got wrong
My thesis was simple and lazy. Cigarette volumes have been declining in developed markets, regulators keep tightening, and a tobacco company can't outrun that math. I treated the company as a yield trap that would grind lower while paying me to wait.
What I missed is that Philip Morris wasn't defending cigarettes. It was funding a replacement with cash from cigarette sales. In 2020, smoke-free products made up 24% of total revenue. By the first half of 2026, that figure hit 42%, and management targets more than two-thirds by 2030. More growth is forecast by 2030, but the direction is settled either way.
Image source: Getty Images.
The quarter that changed my read
Second-quarter net revenue crossed $11 billion for the first time, up 10.4% reported and 7.6% organically, beating the $10.64 billion consensus by 5.2%. Adjusted EPS came in at $2.20, up 15.2%, topping the $2.05 estimate by 7.4% and marking a fifth consecutive quarterly beat. Adjusted operating income reached $4.8 billion, up 12.4%.
The mix is what convinced me. International smoke-free net revenue grew organically by 13.7% in the first half, with gross profit up 16.9%. That segment's gross margin reached 70%, expanding 190 basis points. These are software-like margins on a physical product, and they now sit on nearly half the revenue base.
What the company is up to
IQOS is the engine for the company. Adjusted in-market sales volume grew 5.1% in the quarter, or 10.2% excluding Japan and Poland, where an April excise increase and a flavor ban created transitory drag. IQOS holds roughly 76% of the global heated tobacco category it created, and HTU share stayed stable at 31.8%. Smoke-free products are now available in 108 markets.
ZYN got a regulatory unlock. The FDA granted marketing authorization for 20 ZYN variants during the quarter. United States shipments reached 2.9 billion pouches, up 25% sequentially, with the brand holding 57.1% retail value share. International modern oral shipments grew 32%, excluding the mature Nordic markets. PMI also launched ZYN ULTRA with 9mg and 11mg moist variants.
VEEV is the quiet third leg of the company. E-vapor volume surged 55.1% in the quarter. Total shipments of 205.2 billion units grew 2.5%, and cigarette volumes actually rose 1.1%, which was ahead of expectations.
Why I'm changing my mind now
I think it's time to stop watching from the sidelines with Philip Morris. Management raised 2026 EPS growth guidance to 11% to 13% and reaffirmed 5% to 7% organic revenue growth with 7.5% to 9.5% currency-neutral EPS growth. The company is increasing U.S. investment in ZYN ahead of intensifying competition and preparing the IQOS ILUMA launch.
Three years of 104% returns and five years of 137% didn't happen because of financial engineering. They happened because the company built a higher-margin business within a declining one and reached the point where the new business drives growth. That's a pivot I didn't think was possible, and I was wrong.
At $191.89, the stock is no longer cheap, and some analysts peg total upside near 20.4%, or a 6.6% annualized return, which falls short of what equity risk usually demands. So I'm changing my mind about the business, not claiming the stock is a bargain. Those are different admissions, and only the first one was my mistake.
