- Philip Morris International (PM) posted strong Q3 results, with EPS ahead of expectations but revenue slightly trailing consensus.
- PM’s revenue increased 13.8% to $9.14 billion in Q3, while organic revenue growth was 9.3%. Growth was driven by total cigarette and heated tobacco units (HTU) shipment volume growth of 2.2%. Smokeless HTU volumes grew by 18%, while cigarette volumes declined by 0.5%, although pricing increased by 9%. Adjusted operating income increased by 11.3% on an organic basis, with adjusted operating margin increasing to 40.8% from 39.4% in Q2. Adjusted diluted EPS of $1.67 was up 20.3% from a year ago and beat the consensus expectation of $1.62.
- Significantly, PM reported that its tally of total IQOS users, its main HTU product, at the end of the quarter was approximately 27.4 million, up by 0.2 million from Q2. PM has invested heavily in IQOS over the years as it aims to transition away from a traditional cigarette company towards reduced risk or smokeless products. To this end, it also acquired Swedish Match in 2022 for $16 billion largely to increase its exposure to smokeless products like snus and nicotine pouches.
- Due to the strong quarter, PM lifted its full-year growth outlook for adjusted diluted EPS to a range of 10.0% to 10.5%, excluding currency. This works out to EPS of $6.05 to $6.08 for the full year, versus the prior forecast for $5.96 to $6.05.
- Growth prospects look upbeat for PM with the company expected to sell IQOS in the US from April 2024. PM has no meaningful exposure to the US, which is the most profitable tobacco market globally. The acquisition of Swedish Match should also provide PM with potentially lucrative opportunities in the US.
- However, the company does face significant risks, including the ever more stringent regulation on tobacco products from regulators globally. Several countries have clamped down heavily on tobacco-related products. In addition, cigarettes still constitute the major part of PM’s business, but volumes are declining rapidly globally. Although this trend of declining volumes has been offset by price increases, a trend which cannot continue indefinitely.
- On a forward PE of 14.8x, we feel a fairly decent margin of safety exists, even if the growth scenario does not play out. Investors are also being compensated by an attractive dividend yield of 5.6%, with dividend payments likely to grow in the medium term. PM has increased its dividend for 15 consecutive years. PMI is held in both global managed portfolios as well as the Cratos BCI Worldwide Flexible Fund.By Desmond eEsakov
Join our Mailing list!
Sign up to get all the latest financial news and business updates.
Sign up to get all the latest financial news and business updates.