Navigating Through Smoke, A Bright Future With IQOS And ZYN Amidst Challenges

Key Takeaways

• Expansion of smoke-free products like IQOS ILUMA and ZYN in various markets suggests increasing revenue from market penetration and consumer adoption.
  
• Initiatives for manufacturing and back-office efficiencies aim at sustainable improvements in net margins and earnings, supporting long-term growth.
  
• Relying on pricing and smoke-free investments amid geopolitical, regulatory, and currency challenges may pressure margins and earnings.

Catalysts

Operates as a tobacco company working to delivers a smoke-free future and evolving portfolio for the long-term to include products outside of the tobacco and nicotine sector.

• Continued double-digit growth in organic net revenue and operating income from the IQOS and ZYN product lines indicates an upward trajectory in revenue and net margins, largely due to the smoke-free product category's robust performance.
  
• The successful expansion of the IQOS ILUMA in numerous markets and its significant contribution to shipment volumes, coupled with a strong start for ZYN in the U.S., suggests future growth in revenue from increased market penetration and consumer adoption.
  
• Pricing actions to mitigate currency headwinds and accelerated cost initiatives imply an improved net margin outlook despite external currency pressures.
  
• Strong shipment volume growth and a favorable mix towards higher-margin smoke-free products are expected to continue to drive gross profit and operating income growth, indicating an improving earnings profile.
  
• The company's focus on manufacturing and back-office efficiencies to prioritize growth investments hints at sustainable improvements in net margins and earnings, supporting long-term growth and value creation.

Assumptions

• Analysts are assuming Philip Morris International's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.1% today to 26.7% in 3 years time.
• Analysts expect earnings to reach $11.6 billion (and earnings per share of $7.47) by about July 2027, up from $7.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2027 earnings, down from 20.6x today. This future PE is greater than the current PE for the GB Tobacco industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Risks

• The reliance on pricing strategy to mitigate currency headwinds might not be sustainable long-term if economic conditions or regulatory landscapes change, potentially impacting earnings and net margins.
  
• The expectation of continued investment in smoke-free growth could pressure near-term margins if the returns on these investments do not materialize as expected or are delayed.
  
• Geopolitical risks, including the ongoing situation in Russia and the impact of regulatory changes in various markets, could unpredictably affect product distribution and sales, impacting revenue.
  
• Significant currency devaluation in markets like Egypt highlights vulnerability to foreign exchange impacts, which could erode net income when translated to U.S. dollars.
  
• The accelerated manufacturing productivity and cost efficiencies might not keep pace with inflationary pressures or unforeseen expenses, potentially impacting operating income.

Valuation

• The analysts have a consensus price target of $111.31 for Philip Morris International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $134.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $43.3 billion, earnings will come to $11.6 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $105.07, the analyst's price target of $111.31 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.