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Stock Analyst Update

Philip Morris Undervalued After Uneventful Quarter

We are reiterating our fair value estimate and our wide economic moat rating for the firm.

 Philip Morris International (PM) reported fourth-quarter volume, revenue, and EBIT that were exactly in line with our forecasts, although some below-the-line items led to modest upside to our estimate. The company has guided to EPS of at least $5.37 next year, which is slightly above our forecast for 2019, although this has an immaterial impact on our valuation. We are reiterating our $102 fair value estimate and our wide economic moat rating, and we believe that there is significant upside to PMI from current levels.

Total tobacco volumes declined 4.6% in the fourth quarter, dragging the full year decline down to 2.1%, with the combustible portfolio down around 3%. This is slightly steeper than our medium-term forecasts, but it includes the fourth-quarter cycling of very strong heated tobacco stick shipments last year. Pricing remains fairly strong though, with full year price/mix of 5.5%, in spite of the introduction of lower-priced heated tobacco sticks in Japan.

The consolidated operating margin of 38.4% in the full year 2018 fell by almost 2 percentage points, lending support to our thesis that the tobacco manufacturers will face significant headwinds to margins going forward. We expect PMI to deliver on its target of $1 billion in savings from zero-based budgeting program, but it seems likely that the mix shift to heated tobacco could be unfavorable, given higher customer acquisition costs and low-margin devices. This appears more than priced in to the stock at current levels, however.

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Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.