Philip Morris: Shares On Sale As EPS Trends Improve (NYSE:PM)

The Consumer Staples sector has endured its share of volatility in 2023. Rising interest rates and the threat of GLP-1 weight-loss drugs have put pressure on parts of the sector. So far this year, Staples are down about 5%, underperforming the S&P 500. Shares of Philip Morris International (NYSE:PM) are likewise down from mid-year highs.

I have a buy rating on the stock, however. I see its dividend yield as very solid, while earnings growth in the years ahead appears favorable as it diversifies its business mix. I do highlight some technical risks on the chart, though.

Staples Stocks Suffer Slightly in 2023

According to Bank of America Global Research, Philip Morris International was spun off from Altria Group on March 28, 2008. It is one of the largest international cigarette producers, with a share of 28% of the international cigarette/heated tobacco market. Key combustible brands include Marlboro, Parliament, L&M, amongst others. It also is commercializing IQOS, a heat-not-burn product, in over 70 markets. Most of its sales are outside of the US, so monitoring currency moves on a near-term basis is important.

The Connecticut-based $142 billion market cap Tobacco industry company within the Consumer Staples sector trades at a moderate 17.7 trailing 12-month GAAP price-to-earnings ratio and the stock pays a high 5.7% dividend yield, according to Seeking Alpha. With earnings not due out until February next year, shares trade with a low 15% implied volatility percentage while short interest is very modest at under 1% as of November 16, 2023.

Last month, Philip Morris reported Q3 non-GAAP EPS of $1.67, topping Wall Street’s estimates of $1.62. Revenue rose strongly from year-ago levels to $9.1 billion, a 14% annual increase, though it was a slight top-line miss. What should have helped the stock was an upbeat guidance set from its management team – PM executives now see full-year adjusted diluted EPS growth in the 10% to 10.5% range, on a constant-currency basis. Shares did not rally in the days after the report, however.

The stronger-than-expected numbers were driven by the performance of its legacy combustible and heated tobacco business along with strong cost controls. Away from the legacy lines, Swedish Match was a source of strength and limited geopolitical impacts were a boon. As its smokeless platforms grow, earnings advancement should accelerate. Analysts at Argus indeed see its non-combustible areas as being higher-margin segments, helping to drive a higher dividend payout.

Smoke-Free Share Trends Improving

Key risks include adverse currency moves and unfavorable regulatory outcomes around the world, particularly in Canada. Also, weaker adoption of smokeless options would hurt its profit growth trajectory.

On valuation, analysts at BofA see earnings rising just 2% this year, but per-share profits are expected to rise at a faster pace in the outer years. The current consensus, per Seeking Alpha, reveals $6.50 of non-GAAP EPS in 2024 and slightly more than $7 in 2025. Sales growth is expected to rise to 10% this year and in the mid-single digits in the coming two years.

Dividends, meanwhile, are expected to climb at a steady rate over the coming quarters while its free cash flow yield increases, assuming a stagnant share price. With mid-teens P/Es and an EV/EBITDA ratio that is significantly below that of the S&P 500, PM appears reasonably priced.

Philip Morris Intl: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume a 16x forward non-GAAP earnings multiple, slightly below its 10-year average to account for higher interest rates today, and use 2024’s consensus earnings figure of $6.50, then shares should be near $104, making PM modestly undervalued today. Given its low volatility, solid yield, and occasional share buybacks, I see the stock as a fundamental buy today.

PM: Attractive Valuation Metrics

Compared to its peers, PM features a valuation that may be considered slightly less compelling, and its historical growth rate has not been impressive. Still, its reduced-risk products help drive better longer-term growth opportunities. What’s more, the company has a robust track record of high profitability, and its free cash flow yield is attractive. While recent EPS revisions by Wall Street analysts have not been all that promising, PM’s share price momentum has some positive aspects, though I will detail some caution in the chart later on.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4, 2023 earnings date of Thursday, February 8 BMO. No other catalysts are seen on the event calendar.

Corporate Event Risk Calendar

The Technical Take

With a reasonable valuation, the technical situation is mixed. Notice in the chart below that shares have not done much on a price-only basis over the last 11 years. Homing in on the last three years, PM peaked at $112 in early 2022, and the bears have held a tight grip since then. I see the long-term 40-week moving average (comparable to the 200-day moving average) as negatively sloped, while a series of lower highs off the multi-year peak many quarters ago has made life tough on the bulls. Of course, along the way, holders have been paid a reliable yield.

Also take a look at the RSI momentum indicator at the top of the graph. It has been trending lower, confirming the lackluster price action. I would like to see PM rally above $100 and the 40-week moving average to help confirm a bullish breakout. On the downside, there’s support in the low to mid $80s, though shares are now back below the very long-term 200-week moving average. A breakdown under the late 2022 low could risk a move back into the range from 2018 through 2020.

Overall, long with a stop under $80 should work well, and not being quick to exit the stock above $100 may prove wise from a momentum point of view.

PM: Descending Triangle Pattern, $100 Resistance, $82 Support

The Bottom Line

I have a buy rating on Philip Morris International. I see the stock as undervalued today. Its strong dividend yield and reasonable growth outlook offset a neutral chart.