Analyst Note| Philip Gorham, CFA, FRM |
Philip Morris International beat our first quarter earnings per share estimate by a penny, but its performance appears to have been supported by channel inventory movements that we expect to reverse throughout the rest of the year. In addition, management highlighted some potentially weak markets as a result of the COVID-19 outbreak that we had not fully accounted for, so we are lowering our 2020 estimates accordingly, which were already below guidance and S&P Capital IQ consensus, although this has no impact on our $102 fair value estimate. As things currently stand, we do not expect the pandemic to have material long-term implications for the business, but emerging markets may prove to be weaker than we had expected in the short term. We regard the stock as being undervalued, and the lack of visibility into short-term performance is presenting a buying opportunity. At around 13 times 2020 earnings, PMI has one of the highest valuations in the tobacco group, but it is the quality play with a strong portfolio in both cigarettes and heated tobacco.