Company Reports

Philip Morris International reported first-quarter 2024 results that were again marginally ahead of our forecasts on the top line but slightly behind at the operating margin. The company raised full-year guidance for adjusted earnings growth to 9%-11%, 200 basis points higher on both ends on strong top-line growth and margin expansion. This represents a much less dramatic slowdown than what was guided a quarter ago, leading shares to rise by about 3%. We are reiterating our wide moat rating and do not expect to materially change our $103 fair value estimate.

Philip Morris International's, or PMI's, statement of purpose is to completely replace cigarettes with less harmful alternatives as soon as possible. The latest medium-term targets from management imply strong growth over the next three years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it will likely accelerate profitable medium-term growth.

Philip Morris International's, or PMI's, statement of purpose is to completely replace cigarettes with less harmful alternatives as soon as possible. The latest medium-term targets from management imply strong growth over the next three years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it will likely accelerate profitable medium-term growth.

Philip Morris International reported fourth-quarter and full-year 2023 results that were marginally ahead of our forecasts on the top line, but slightly weaker at the operating margin. However, guidance for 2024 implies a slowdown in adjusted earnings growth, and the share price sold off mildly following the release of the report. We are reiterating our wide moat rating and $103 fair value estimate.

Philip Morris International's, or PMI's, statement of purpose is to completely replace cigarettes with less harmful alternatives as soon as possible. The latest medium-term targets from management imply strong growth over the next three years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it will likely accelerate profitable medium-term growth.

Philip Morris International, or PMI, reported third-quarter results that were in line with our forecasts, supported by strong growth in the recently acquired Swedish Match business, continued strong price increases in cigarettes, and positive portfolio volume growth. The pricing performance, in particular, supports our wide economic moat rating, which remains in place. We also retain our $103 fair value estimate and believe that PMI's leadership in heated tobacco, demonstrated by the 18% volume growth achieved in the segment in the third quarter, justifies a valuation premium to competitors. The market may be disappointed by management's lowering of its full-year guidance, but we believe most of the drivers of that change are transitory in nature and do not affect the underlying value of the business.

Philip Morris International's, or PMI's, statement of purpose is to completely replace cigarettes with less harmful alternatives as soon as possible. The latest medium-term targets from management imply strong growth over the next three years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it will likely accelerate profitable medium-term growth.

Philip Morris International, or PMI, reported second-quarter results that were modestly above our expectations, due to robust volume in the core combustible segment. On top of low-double-digit organic net revenue growth, subsidiary Swedish Match made a significant contribution to reported year-over-year revenue growth of 1.5%. We are retaining our $103 fair value estimate and wide moat rating. PMI is trading close to this valuation, and we believe a more attractive risk/return profile exists in some of the slightly-lower-quality tobacco companies such as Imperial Brands and British American Tobacco, but these results again confirm that PMI’s valuation premium to peers is justified, and PMI may prove to be more defensive than most in the event of global macroeconomic deterioration.

Philip Morris International reported first-quarter results that were in line with our expectations, but management guided to slightly weaker full-year earnings growth than we had forecast. While this may be disappointing to investors, the spending behind the rollout of Iluma, Philip Morris’ latest iteration of its Iqos heated tobacco platform, and the associated impact on its margin should drive medium-term growth, allowing Philip Morris to compound its high returns on capital, which have historically been in excess of 30%, for years to come. Therefore, we are maintaining our $103 fair value estimate and wide moat rating, and regard the stock as being slightly undervalued at the close of trading on April 21.

Philip Morris International's, or PMI's, statement of purpose is to completely replace cigarettes with less harmful alternatives as soon as possible. The latest medium-term targets from management imply strong growth over the next three years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it will likely accelerate profitable medium-term growth.

Philip Morris International, or PMI, reported another decent performance in the fourth quarter, with volume and revenue slightly above our forecasts on an organic basis in some of the smaller regions and the decline in operating income slightly less steep than we had expected. There was also a modest revenue contribution from the Swedish Match acquisition, which closed during the quarter, a few days earlier than our assumption. The underlying business appears to be robust, despite the premium positioning of the portfolio and the prevailing risks to consumer spending. It was also a good fourth quarter for the stock, which reversed its underperformance relative to broader indexes, and at the close of business on Feb. 9 was trading a whisker short of our $103 fair value estimate. We retain our valuation and wide moat rating.

Philip Morris International reported decent third-quarter results that were close to our forecasts on an organic basis. The underlying business appears to be robust, with the consumer so far hanging in there amid higher inflation. The stock, on the other hand, had a poor third quarter and underperformed the S&P 500 by around 4 percentage points, most likely due to the continuing strength of the U.S. dollar and rising interest rates, which have closed the gap between the dividend yields on consumer staples companies and the yields available on other asset classes. We are retaining our $103 fair value estimate and see two ways that long-term investors can outperform with this wide-moat business.

Altria, the leading U.S. cigarette manufacturer, and Philip Morris International have reached an agreement under which Altria will forgo the exclusive rights to commercialize iQOS, PMI's heated tobacco brand, in the U.S. from April 2024 in return for payments totaling $2.7 billion. In other news, PMI has increased its offer for Swedish Match to SEK 116 per share, representing a total acquisition value of roughly USD 16 billion. Neither of these events affect our fair value estimates for either company, and we retain our USD 52 and USD 103 per-share valuations of Altria and PMI respectively. While both stocks are around 15% undervalued, we believe PMI is the higher-quality business, with global leadership in the heated tobacco category, and it may unlock value by distributing iQOS in the U.S. through Swedish Match distribution infrastructure.

On an underlying basis, Philip Morris International's, or PMI, second-quarter results were strong, demonstrating that the tobacco sector is again proving to be fairly defensive in a period of economic challenges. However, the recent strength of the U.S. dollar had a negative impact on second-quarter results, and is likely to do so for the rest of this year. We retain our USD 103 fair value estimate, and with its very strong positioning in heated tobacco and wide economic moat, we continue to view PMI as the quality play in the tobacco group. However, although there is modest upside to our estimate of intrinsic value, some competitors, particularly Imperial Brands, appear even more undervalued.

Philip Morris International's, or PMI's, Unsmoke campaign signals an intent to go further in replacing cigarettes with reduced risk alternatives. The latest medium-term targets from management imply strong growth over the next three to five years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it's likely to accelerate profitable medium-term growth.

Philip Morris International and Swedish Match (not covered) have confirmed talks are ongoing between them regarding a potential acquisition of Swedish Match by Philip Morris. Financial terms were not disclosed but we suspect there is little wiggle room for a deal to create value at a price above Swedish Match's market cap of SEK 123 billion at the close of business on May 9. However, we do think there could be strategic and financial benefits from the access to the U.S. market that Philip Morris would gain. We retain our USD 103 fair value estimate for Philip Morris but will review this depending on whether the deal closes and on what financial terms.

There were only minor variances from our estimates in Philip Morris International's, or PMI's, robust first-quarter results, and we are maintaining our $103 fair value estimate. The headline from the report was that volume in Eastern Europe declined less than we had feared, but with PMI planning to exit Russia this year, we retain our forecasts for the region which had assumed such a strategy. After the initial overreaction to the financial impact of events in Ukraine to PMI, we think the market has course corrected and the shares are now fairly valued.

We are again lowering our fair value estimate for Carlsberg to DKK 910 from DKK 945 in light of the decision to exit Russia, but we are leaving other valuations across our European fast-moving consumer goods, or FMCG, coverage intact. Several companies have announced, over the last 24 hours, various exit strategies to dispose of their Russian assets. We expect this to destroy value for those companies that hitherto operated in Russia, but because it is a relatively low-margin market, write-downs in most cases are likely be limited to low single digits as a percentage of market capitalization.

We have updated our cash flow forecasts and valuations of our tobacco coverage following the announcement from several leading cigarette manufacturers that they intend to change their strategy in the Russian Federation in light of sanctions imposed by the west. While we consider events to be materially negative to cash flows at least in the short term, we think the market has overstated the valuation impacts. We are lowering our valuation of Philip Morris International (PMI) to $103 from $108, and of British American (BAT) to GBX 3,900 from GBX 4,000.

Philip Morris International's, or PMI's, Unsmoke campaign signals an intent to go further in replacing cigarettes with reduced risk alternatives. The latest medium-term targets from management imply strong growth over the next three to five years, and the company aims to generate over half of its revenue from noncombustibles by 2025. We regard this as ambitious, perhaps a stretch goal, but we are in no doubt that if events go its way, PMI could be the first Big Tobacco firm since the 1990s to diversify half of its cash flow away from cigarettes. We regard this as a sound strategy from an environmental, social, and governance, or ESG, perspective, and because it's likely to accelerate profitable medium-term growth.