Company Name: Philip Morris
Entry Price: $88,5
Target Price: $110
Projected Yield: 24,3%
Projected Dividend Yield: 5.30% per annum
Time Line: 3 to 6 months
Position Size: 2%
About Philip Morris
Philip Morris International is one of the world's largest tobacco corporations headquartered in the US. It has 46 tobacco plants and markets its production in 180 countries.
Philip Morris owns such brands as Marlboro, Parliament, Bond, Chesterfield, L&M, Nex, Philip Morris, President, and HEETS, the latter being IQOS sticks.
What's the Idea?
The idea is to get profit from a stock that may rise with the company's switching to manufacturing low health risk products and high dividend yields.
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Why Trade Philip Morris?
Reason 1: New Development Strategy and Expanding Low Health Risk Product Share
Over the last few years, the tobacco market has been stagnating because of the healthy life style trend. In 2019, the WHO launched a survey, which proved that the number of smokers had been reduced by 60M people from 2000 to 2018. There had been a 30% drop in the female smoker number, which reached 244M, while the number of male smokers increased, if only by 4%, to reach 1.09B.
The pandemic also added to the tobacco demand decline, which did affect Philip Morris' business: in 2020, the tobacco supplies dropped by 10.90%, while the earnings went down by 9.70%. The most challenging issue was a drop in Marlboro demand, as this brand accounts for 37% of all Philip Morris production.
Despite all this, Philip Morris is still a good investing option, mostly due to its development strategy. The company is actively working in the low heath risk product segment, including IQOS sticks, which the company believes to be less harmful for health than traditional cigarettes, based on its own research. In July last year, the US's FDA approved IQOS marketing campaign as a tobacco product with a "modified risk", which allowed Philip Morris to get it licensed in the US through Altria Group, its partner company.
Apart from IQOS, Philip Morris is investing into other similar things, such as TEEPS with a charcoal heater and STEEM, which works like an inhaler. Over the last few years, the "modified risk" tobacco product market is growing heavily, with the number of IQOS users, which are legal of age, having reached 17.60M last year. Meanwhile, the stick supply volume reached 76B pieces, the yearly growth came at 27.60%, and the earnings share coming from IQOS hitting 23.80%, with 26% in Q4. The overall earnings growth came at 22.20%.
The management is quite optimistic about the low health risk segment and is planning to rearrange the business to mostly target this area. By 2023, a 40% of earnings should account for this segment, while by 2025, the management is aiming for 50%+. The IQOS stick production volume is expected to at least double to reach 140B to 160B pieces by 2023. This might be well boosted by launching new products, such as IQOS ILUMA and IQOS VEEV, and expanding to new markets (from 64 countries as of now all the way to 100).
This strategy may not only help the company overcome the stagnation in the long term, but also improve its brand perception in the society.
Reason 2: Financial Performance and Dividends
Despite the stagnation and the pandemic, Philip Morris was able to post good financial figures, mostly because of its new development strategy. Over last year, the earnings dropped by just 3.50% to $28.70B, while the operating profit margin rose by 39.50% to 40.80%, and the diluted EPS amounted to $5.17 against $5.19 a year before.
With a stable financial position, Philip Morris also has low debt burden: the debt is at $31.50B, the cash is at $7.30B, and the Net Debt/EBITDA ratio is at 2.45х, quite in line with the competition. The liquidity is fine, with the operating cash flow amounting to $9.80B last year, with a CapEx of $0.60B.
This operating cash flow is mostly used for dividend payments, which increased to $4.80 per share. Currently, the dividend yield is 5.30%, which makes this stock a better investment opportunity.
The outlook for 2021 by the company management is quite positive, with the IQOS stick delivery volume reaching 90B to 100B pieces, boosting the earnings by 4% to 7%. The operation margin should increase by 1.50%, while the EPS is expected between $5.90 and $6.00. Finally, the operating cash flow should reach $11B, with the CapEx at $0.80B.
The EV/S ratio is currently at 5.7, the EV/EBITDA, at 11.9, the PE, at 17,.5x, and the Forward PE, at 13,7x.
This is below the historical data and means the company is underpriced, while also being in line with the industry-based competition.
A few investment companies and banks, such as Smith Barney Citigroup, Stifel Nicolaus, and Morgan Stanley raised their target prices for Philip Morris stock, to $105, $100, and $103, respectively.
In summary, with the increasing demand for low health risk products and rather high dividend yields, Philip Morris could well be a good investing option.
How to Use the Idea
- Buy the stock at $88,5.
- Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $110.
How to Buy Philip Morris Shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type PM.US (Philip Morris ticker in the NASDAQ) in the search box, and select Philip Morris in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type PM.US (Philip Morris ticker in the NASDAQ) and select Philip Morris in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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