Despite Weak Results, Philip Morris’s Valuation Beats Its Peers

Philip Morris Let Down Investors with 1Q16 Earnings

(Continued from Prior Part)

Relative valuation

Philip Morris International (PM) and Altria Group (MO) are trading at higher valuations relative to the S&P 500 Index (IVV) (SPY) (VOO) and the Dow Jones Industrial Average (DIA). Philip Morris is trading at a PE (price-to-earnings) multiple of 21.2x forward earnings. Altria Group is trading at 19.5x forward earnings. In comparison, the S&P 500 Index and the Dow Jones Industrial Average are trading at forward PE multiples of 17.8x and 16.7x, respectively. All valuations are as of April 21, 2016.

Valuation of peers

Competitors Reynolds American (RAI) and British American Tobacco (BTI) are trading at lower PE multiples of 20.2x and 18.3x, respectively, compared to Philip Morris. Vector Group (VGR) is trading at a higher valuation multiple of 26.3x.

The Markets generally value companies at higher multiples if growth expectations are higher. Reynolds American’s sales growth for the trailing 12 months was 26%, the highest among its peers. Vector Group’s and Japan Tobacco’s (JAPAY) (JAPAF) sales growth came in at 6.3% and -6.1%, respectively.

To learn more about RAI’s asset sale to JAPAF, please read Japan Tobacco Buys Natural American Spirit’s International Assets .

Measures to increase volume

Despite the current environment, Philip Morris’s total shipment volume increased 2.8% in cigarette equivalent units in 1Q16. Marlboro’s shipment volume increased 1.4%, reflecting growth in Italy, Spain, Korea, and Mexico. For 2016, Philip Morris expects a decline of 1%–1.5% in its organic cigarette volume.

However, the company is taking measures to increase shipment volume of other brands such as Lark and Parliament. A week before the earnings announcement, PM submitted an application to the Ministry of Finance for approval to increase the prices of all Lark variants and some Parliament variants by 7–10 yen per pack, effective August 1, 2016.

These variants represent approximately 45% of the company’s cigarette volume in Japan.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Philip Morris Let Down Investors with 1Q16 Earnings

• Part 2 - Philip Morris in 1Q16: Revenue, Organic Cigarette Volume Decline

• Part 3 - Philip Morris’s Favorable Pricing in Germany