On Thursday, Morgan Stanley (NYSE:MS) initiated coverage on shares of Philip Morris International Inc. (NYSE:NYSE:PM) shares, bestowing an Overweight rating and establishing a price target of $140. The move reflects the firm's optimism about the tobacco company's future performance, particularly due to its expanding smoke-free product portfolio.
With a market capitalization of $184 billion and impressive gross profit margins of 64%, Philip Morris maintains its position as a prominent player in the tobacco industry. InvestingPro data reveals the company offers an attractive dividend yield of 4.56% and has maintained dividend payments for 17 consecutive years.
According to Morgan Stanley's analysis, Philip Morris's shift towards reduced-risk, smoke-free products is expected to fuel long-term sales and earnings growth, which could lead to an upward re-rating of the stock. In 2024, smoke-free products made up approximately 38% of the company's net revenue. The research firm projects that by 2030, these products will account for 55-65% of sales, slightly below the company's own target of over two-thirds.
The growth of Philip Morris's smoke-free portfolio is anticipated to be driven by the international momentum of its IQOS brand, the robust growth of Zyn, and the upcoming U.S. launch of IQOS.
This expansion, coupled with a modest increase in combustible sales and profit, positions Philip Morris to potentially achieve the higher end of its 6-8% organic sales growth target, surpassing its 8-10% operating income and 9-11% constant currency earnings per share growth algorithm through 2026. These figures are projected to outpace those of other mega-cap consumer packaged goods companies.
Despite Philip Morris's shares increasing by 25% over the last twelve months, which is comparable to the S&P 500's 22% gain, the company's stock has fallen 11% from its December highs. This decline contrasts with a slight 2% drop in the S&P 500 over the same period.
Currently, Philip Morris's shares are trading at a valuation in line with their 10-year average next twelve months price-to-earnings ratio, despite the higher proportion of revenue coming from smoke-free products today.
Furthermore, Morgan Stanley's analysis suggests that Philip Morris is trading at a roughly 34% discount to what they consider its theoretical fair value. This valuation is based on a regression of long-term organic sales growth against the 2026 price-to-earnings ratio for its mega-cap peers. The firm anticipates that this gap in valuation will narrow as the market increasingly recognizes the enhanced growth profile resulting from Philip Morris's transition towards smoke-free products.
With current revenue growth of 8.6% and a strong financial health score of "GOOD" according to InvestingPro, the company appears well-positioned to achieve its growth targets. Over the next five years, Morgan Stanley forecasts a compound annual growth rate of approximately 7% for Philip Morris's net sales and operating income, which exceeds the market-implied growth rate of around 5.5% derived from their reverse discounted cash flow model.
In other recent news, Philip Morris International Inc. has finalized the sale of its subsidiary Vectura Group Ltd. to Molex Asia Holdings Ltd., a move that marks the end of the association between the two companies.
This development comes as Philip Morris also announced the issuance of $3 billion in senior unsecured notes to bolster its general corporate funds. Analysts at Barclays (LON:BARC) maintained an Overweight rating on Philip Morris, citing industry-leading revenue and earnings per share (EPS) growth.
Meanwhile, the Biden administration is expected to propose a restriction on the amount of nicotine in cigarettes, a measure that would not extend to other nicotine products such as e-cigarettes or nicotine replacement therapies.
The U.S. Food and Drug Administration (FDA) has also submitted a proposal to significantly reduce nicotine levels in traditional cigarettes, a public health initiative that could have a large impact on the tobacco industry. These recent developments highlight the evolving regulatory landscape for tobacco companies like Philip Morris.
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