By The Valuentum Team
Philip Morris International Inc. (NYSE:PM) owns a number of of the top-selling cigarette manufacturers worldwide together with the Marlboro, L&M, Chesterfield, and Parliament manufacturers together with its IQOS “smoke-free” tobacco product. It sells these merchandise outdoors of the US after parting methods with Altria Group, Inc. (MO) in 2008. The firm makes use of its pricing power to offset headwinds arising from inflation and the secular decline in cigarette cargo volumes, to a level, which helps its money move outlook as does its push into various tobacco merchandise. We are massive followers of Philip Morris’ steady money move profile, pricing energy, and ongoing price construction enchancment initiatives. The agency is a stellar earnings technology thought with ample room to develop its dividend over the approaching years, with shares of PM yielding ~5.0% as of this writing.
The firm goals to generate over half of its revenues from smoke-free merchandise by 2025, with heated tobacco unit gross sales main the best way. Sales of the agency’s IQOS providing have grown at a brisk tempo over the previous few years with ample room for upside. Recently, Philip Morris has utilized acquisitions to develop its publicity to the pharmaceutical and client well being and wellness area. That consists of buying OtiTopic, Fertin Pharma, and Vectura. By 2025, Philip Morris goals to generate no less than $1.0 billion in web revenues from the sale of non-nicotine merchandise.
We don’t anticipate the corporate to alienate its income-minded traders within the foreseeable future and recognize Philip Morris’ ‘A-rated’ investment-grade credit standing (A2/A/A). The agency has grown its annual dividend from $1.84 per share in 2008 to $5.00 per share on an annualized foundation at present. Looking forward, we see room for added payout development as Philip Morris forecasts that it’ll generate 4%-6% natural income development (an adjusted non-GAAP determine) and eight%-11% currency-neutral adjusted diluted EPS development (a non-GAAP determine) this yr. The firm’s development outlook is vibrant.
Philip Morris advantages from its publicity to faster-growing areas of the world, together with Asia and EMEA. Still, it stays uncovered to regulatory danger and excise value shocks that will impression demand for tobacco in sure international locations. Currency fluctuations can pose stiff earnings headwinds at occasions and shouldn’t be ignored. Philip Morris is cutting down its enterprise in Russia within the wake of the Russian invasion of Ukraine and intends to exit the Russian market.
Using 2020 as a baseline, Philip Morris goals to generate ~$2.0 billion in annualized financial savings by 2023 with an eye fixed in direction of lowering manufacturing prices and containing SG&A bills. An enhancing price construction helps the corporate’s outlook. In 2021, Philip Morris launched a three-year share buyback program anticipated to whole round $5.0-$7.0 billion. The agency is concentrating on a long-term dividend payout ratio of ~75% of its adjusted diluted EPS.
Economic Profit Analysis
The finest measure of a agency’s skill to create worth for shareholders is expressed by evaluating its return on invested capital [‘ROIC’] with its weighted common price of capital [‘WACC’]. The hole or distinction between ROIC and WACC is known as the agency’s financial revenue unfold. Philip Morris’ 3-year historic return on invested capital (with out goodwill) is 116.9%, which is method above the estimate of its price of capital of 9%.
In the upcoming graphic down beneath, we present the possible path of ROIC within the years forward primarily based on the estimated volatility of key drivers behind the measure. The stable gray line displays the more than likely end result, in our opinion (the “base” case situation), and represents the situation that leads to our honest worth estimate (the blue dots symbolize the “bull” case situation and the inexperienced dots symbolize the “bear” case situation).
The upcoming graphic down beneath highlights how we calculated Philip Morris’ estimated WACC.
Cash Flow and Balance Sheet Analysis
Philip Morris is a stellar free money move generator, defining free money move as web working money move much less capital expenditures. It is its free money flows that allow Philip Morris to sustainably pay out and develop its dividends, conserving its stability sheet issues in thoughts.
From 2019-2021, Philip Morris generated ~$9.9 billion in free money move per yr on common, and its run-rate dividend obligations stood at $7.6 billion final yr. While Philip Morris has traditionally not repurchased significant quantities of its widespread inventory, after launching its three-year buyback program it acquired $0.8 billion of its widespread inventory in 2021.
However, we warning that Philip Morris had a web debt load of $23.3 billion on the finish of December 2021. The firm has ample liquidity because it exited 2021 with $4.5 billion in money and money equivalents available to satisfy its near-term funding wants.
Our discounted money move course of values every agency on the premise of the current worth of all future free money flows. We suppose Philip Morris is price $100 per share with a good worth vary of $80.00-$120.00. Our near-term working forecasts, together with income and earnings, don’t differ a lot from consensus estimates or administration steerage. Our money move mannequin displays a compound annual income development charge of three.1% in the course of the subsequent 5 years, a tempo that’s increased than the agency’s 3-year historic compound annual development charge of two%. Our mannequin displays a 5-year projected common working margin of 45.2%, which is above Philip Morris’s trailing 3-year common. Beyond Year 5, we assume free money move will develop at an annual charge of two.1% for the following 15 years and three% in perpetuity. For Philip Morris, we use a 9% weighted common price of capital to low cost future free money flows.
The upcoming graphic down beneath gives a visible deconstruction of Philip Morris’ intrinsic worth damaged down by the enterprise cycle section, together with its web stability sheet issues.
Although we estimate Philip Morris’ honest worth at about $100 per share, each firm has a spread of possible honest values that is created by the uncertainty of key valuation drivers (like future income or earnings, for instance). After all, if the long run have been identified with certainty, we would not see a lot volatility within the markets as shares would commerce exactly at their identified honest values.
In the upcoming graphic down beneath, we present this possible vary of honest values for Philip Morris. We suppose the agency is enticing beneath $80 per share (the inexperienced line), however fairly costly above $120 per share (the purple line). The costs that fall alongside the yellow line, which incorporates our honest worth estimate, symbolize an inexpensive valuation for the agency, in our opinion.
We are massive followers of Philip Morris’ earnings development potential, and the corporate additionally has significant capital appreciation upside as properly. Philip Morris’ push into various tobacco merchandise and non-nicotine merchandise together with its price construction enchancment initiatives helps its longer-term free money move development outlook. To obtain our 16-page inventory report of Philip Morris, please click on right here (pdf). There is lots to love about Philip Morris, and we hope you proceed to get pleasure from our work.