Despite an increase of more than 60% from its March 2020 lows, Philip Morris Action (NYSE: PM) still seems slightly undervalued. PM stock fell from $ 61 to $ 99 from its recent low against the S&P 500 which rose almost 90% from its 2020 lows. PM stock underperformed the market because the drop in the share price during the coronavirus crisis was far less than the drop in the broader market in the first place. Thus, the recovery was less than that of the market. The stock is currently near a three-year high, 50% above levels seen in December 2018. Despite this, there is still a marginal upside margin of nearly 5%. We believe that the gradual lifting of lockdowns will lead to increased shipments (seen in Q1 2021) and revenues as supply constraints ease. With the trend away from combustible tobacco products in favor of electronic cigarettes, the company’s focus on its IQOS electronic cigarette brand will help it further increase its market share, revenue and profits. Our dashboard Philip Morris International Inc stock has gained 49% since 2018 has the underlying numbers behind our thinking.
The increase in the share price between 2018-2020 is justified by the 55% increase in the P / S multiple. It was despite Philip Morris income increasing from 3% from $ 29.6 billion to $ 28.7 billion during this period. The drop in revenues is mainly due to the 8.1% drop in the volume of unit shipments of cigarettes and heated tobacco amid lockdowns imposed during the pandemic, which affected supply chains. However, margins increased during this period from 26.7% in 2018 to 28.1% in 2020, mainly due to lower cost of sales, reduced marketing expenses and lower excise duties. The strong increase in the P / S multiple mainly reflects good growth in the electronic cigarette segment and improved margins. We believe the P / S multiple will remain high, near its current level, due to expectations of healthy revenue and earnings growth in the coming quarters and more people switching to tobacco products. heated like IQOS.
The global spread of the coronavirus which has led to lockdowns in various cities around the world, has affected industrial and economic activity, in turn affecting consumption and consumer spending. Although tobacco is a defensive industry, PM’s shares have been affected by the crisis as Philip Morris’s operations are spread across all geographies with lockdowns placing significant barriers to its global supply network. This was mainly reflected in PM’s second quarter 2020 results, where PM reported a 17.6% year-on-year decline in cigarette shipments, with total revenue falling 13.6% while profits fell 16%. For the full year of 2020, PM’s revenue decreased 3.7% year-on-year.
With the gradual lifting of global lockdowns, Philip Morris’ supply constraints are expected to ease over the coming months. This was reflected in the first quarter of 2021, where the company exceeded analysts’ expectations and provided positive forecasts for the quarters to come. Heated tobacco shipments increased 30% year-on-year in the first quarter of 2021, while the market share of heated tobacco units in markets where IQOS is sold increased 1.7% to 7.6%. With the vaping market set to grow at a healthy double-digit rate in the coming years, Philip Morris is expected to benefit from increased sales of IQOS. Any further recovery and its timing depend on the wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Israel. Growing demand for IQOS, rising cigarette prices and a standardized supply network are expected to drive healthy revenue and margin growth in the coming quarters. As investor attention has now shifted to the 2021 and 2022 numbers, the market is likely to overlook short-term volatility. The recent spike in positive cases for Covid in Europe is a source of concern for the company as the reimposition of another lockdown will be a major obstacle to the recovery of the stock. However, that seems unlikely at the moment. In the absence of new blockages such as those seen in the first half of 2020 and the rollout of a successful vaccination program, the recent increase in the stock of PM is justified, in fact, it is expected to increase further. According to Trefis, Philip Morris review comes down to $ 105 per share.
While shares of Philip Morris may have moved, 2020 has created a lot of price discontinuities that may present some exciting trading opportunities. For example, you will be surprised at how the valuation of stocks for Coca-Cola vs. Merck shows a disconnect with their relative operational growth. You can find a lot of these discontinuous pairs here.
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