PMI's IQOS and ZYN Spearhead Revenue Surge and Propel Market Leadership in Smoke-Free Innovation

What are the underlying business or industry changes driving this perspective?

• Accelerated growth in smoke-free products, with IQOS and ZYN driving significant increases in net revenues and gross profit, directly impacting future revenue growth and profitability.
• International expansion and market penetration of IQOS, particularly in Europe, Japan, and emerging markets, expected to enhance volume growth and bolster market share, contributing to revenue growth.
• Integration and successful performance of ZYN within the PMI portfolio, especially in the U.S., providing an organic uplift to operating income margins, thus improving net margins.
• Continuous innovation in smoke-free product offerings, including the rollout of IQOS ILUMA, aimed at increasing user base and market penetration, which is forecasted to drive mid to long-term earnings growth.
• Strategic focus on sustainability and adoption of tobacco harm reduction policies by governments, enhancing PMI's market positioning and potentially reducing regulatory risks, positively influencing long-term earnings sustainability.

How have these above catalysts been quantified?

• Analysts are assuming Philip Morris International's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.1% today to 26.9% in 3 years time.
• Analysts expect earnings to reach $11.4 billion (and earnings per share of $7.38) by about March 2027, up from $7.8 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 16.5x on those 2027 earnings, down from 18.7x today.
• To value all of this in today’s dollars, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The ongoing regulatory changes and potential bans on characterizing flavors in the EU could lead to a temporary disruption in in-market sales volume for IQOS, impacting revenue growth net margins.
• The escalation of pricing competition, especially in the heat-not-burn category in Europe and Japan, could pressure margins if Philip Morris International (PMI) is forced to respond with price decreases to maintain market share.
• The acknowledgment of significant cost and supply chain headwinds in the first half of 2023, particularly relating to combustibles, indicates potential ongoing challenges that may affect cost of sales and operating income margin.
• Increasing competition and regulatory scrutiny in the U.S. market for smoke-free products like ZYN could impose challenges in maintaining its explosive growth, affecting net revenues and earnings growth projections.
• The reliance on third-party manufacturing in Indonesia and Ukraine introduces risks related to geopolitical tensions, regulatory changes, and potential disruptions in supply chains, potentially affecting cost effectiveness and margins.

• The analysts have a consensus price target of $106.65 for Philip Morris International based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $42.3 billion, earnings will come to $11.4 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $93.95, the analyst's price target of $106.65 is 11.9% higher.
  
• 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.