The research and development campus of cigarette and tobacco manufacturing company Philip Morris International in Switzerland.
Fabrice Coffrini/AFP via Getty Images
The war in Ukraine could cause a serious dent in sales at Philip Morris , bringing some near-term headwinds to the stock, according to J.P. Morgan analyst Jared Dinges.
The analyst downgraded shares of Philip Morris (ticker: PM
) to Neutral from Overweight and cut his price target to $110 from $130 on Monday. The stock was falling 6% to $93.76.
Philip Morris’ international branch derives about 8% of group sales from Russia and Ukraine combined. More importantly, the two countries account for about 23% of its heated tobacco unit volume. Heated tobacco products are key to Philip Morris’ next-generation growth strategy, as they are reportedly less harmful than cigarettes.
If successful, Philip Morris could cash in on nearly $10 billion of cumulative investments in next-gen products, the analyst said. But that could take longer than expected given the company’s exposure to Russia and Ukraine.
“The recent tensions in Ukraine has clouded PMI’s ability to achieve its near- and medium-term NGP [next generation product] targets,” Dinges wrote.
J.P. Morgan recently cut its Russia GDP growth forecasts as a result of the sanctions levied against the country. Philip Morris also suspended its operations in Ukraine, including its factory in Kharkiv, after Russia invaded Ukraine at the end of February. Given those factors, Dinges no longer believes Philip Morris could meet its 2022 guidance for heated tobacco products, or its 2021 heated tobacco target.
“NGP momentum is a fundamental pillar in the PMI equity story,” he added.
Before Russia invaded Ukraine, some analysts were optimistic that the stock could rally and perform well despite rising inflation, given the sector’s strong pricing power without impacting demand. Eleven out of the 18 analysts covering the stock still rate it a Buy, while seven gave it a Hold rating, according to FactSet. In December, 13 rated it a Buy, and five rated it a Hold.
“Beverage and tobacco stocks have some of the largest exposures to geopolitical impacted markets of Ukraine, Russia and Belarus,” wrote Citigroup analyst Simon Hales on Monday.
Write to Sabrina Escobar at [email protected]
