An upgrade from JPMorgan sent shares of the tobacco company higher on Friday.
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Philip Morris ‘ investment in a smoke-free future has another analyst excited.
Shares of Philip Morris were climbing Friday morning, boosted by an upgrade from JPMorgan, which argues that the tobacco giant is leading the global charge in what the firm calls “reduced-risk products” that heat, rather than burn, tobacco.
Analyst Jared Dinges lifted his rating on Philip Morris (ticker: PM) to Overweight from Neutral, and his price target to $105 from $81.
Dinges writes that the move comes as heated tobacco products have been gaining market share more quickly than he anticipated, especially in key markets like Central and Eastern Europe. That comes as vaping–where uses inhale vapor instead of smoke–lags behind prior growth in many regions. With an 82% share for its heat-not-burn device IQOS, Philip Morris “is the clear leader…and already makes profits which we believe will accelerate going forward,” Dines says.
The company’s dominance in heated tobacco makes Philip Morris’s economics “highly attractive,” with what Dinges estimates will be a 14% earnings-per-share compound annual growth rate from 2020 through 2023—bolstered by stock repurchases. Moreover, its valuation remains “undemanding,” trading at less than 15 times his full-year earnings per share estimate and 11.4 times on an enterprise value to earnings before interest, taxes, depreciation, and amortization basis.
While Dinges doesn’t think that Philip Morris will necessarily be able to meet its target to ship 140 billion heated tobacco units by 2023, he did increase his volume estimates and writes that the “ability of heated tobacco to drive margin expansion is under-appreciated,” meaning the company could deliver upside surprises in this area.
Overall he lowered his full-year earnings per share estimate 2% to $5.95 for 2021 to account for unfavorable foreign exchange rates. He boosted his 2022 and 2023 earnings-per-share estimates by 2% and 7%, respectively, citing greater profitability for its reduced-risk portfolio and some $7 billion in cumulative share buybacks. He also notes that Philip Morris is “best in class,” for ESG investing (environmental, social and corporate governance) within the tobacco industry. While Philip Morris is not a traditional focus for sustainable investors, some are warming to the company’s efforts to reduce adverse health effects of its products.
Barron’s spoke with Philip Morris management in December about the company’s plans to convert traditional smokers to its products as it looks toward a future without combustible cigarettes. Its incoming CEO Jacek Olczak said its investment in smoke-free alternatives has been “a massive investment, but it equips the company with the right assets going forward.”
Philip Morris is up 1.1% to $90.43 in recent trading. Other analysts have also touted its improving competitive position in the smokeless space as traditional cigarettes fade in importance.
Write to Teresa Rivas at [email protected]
