Earlier this month, Philip Morris (NYSE: PM) announced that it will install a new CEO in May 2021. Current CEO André Calantzopoulos will become Executive Chairman of the Board and current COO Jacek Olczak will step into the lead role.
You may remember that Calantzopoulos made waves earlier this year when he said “it is possible to completely end cigarette sales in many countries within 10 to 15 years.” Well, Olczak left no uncertainty about where he stands, saying that he is committed to delivering a “smoke-free future.”
It’s easy for a casual observer to look at these statements and think they represent a death-wish for the tobacco giant. In 2019, Philip Morris sold just over 700 billion cigarettes. But Philip Morris’ success in the reduced-risk products (RRPs) space means that a smoke-free future won’t lead to a sales-free future. Not by a longshot.
PM is Expecting to Sell 250 Billion RRP Units by 2025
Philip Morris sold 60 billion RRP products in 2019, which was up 44% from 2018. The company thinks that its RRP growth story is still in the early innings. It is targeting 90-100 billion units in 2021 and 250 billion units by 2025.
Is this just pie in the sky company speak? Or can Philip Morris actually get to 250 billion units by 2025?
The company’s IQOS user growth indicates that the target is attainable. On the Q3 2020 earnings call, management said, “We estimate that there were 16.4 million total IQOS users as of September the 30th. This represents the addition of around 1.1 million adult users since the end of the second quarter and over 4 million since the same time last year, with more users added in both Q3 and year-to-date than the corresponding period in 2019.”
It’s important to note: the vast majority of this user growth is coming from former smokers that are trying to lower their risk. Philip Morris estimates that 11.7 million (72%) of those 16.4 million IQOS users are adult smokers who have stopped smoking. According to Philip Morris, the rest are “in various stages of conversion.”
When you consider the growth rates and where that growth is expected to come from – Philip Morris doesn’t expect to acquire millions of new users that have never touched a tobacco product – the 250 billion target seems reasonable.
Value + Dividend Combination is Appealing
The RRP outlook doesn’t change the fact that Philip Morris will grow revenues at a mid-single digit rate in the long run – in a bull scenario.
But the valuation and dividend yield more than compensate you for the risk that it doesn’t. The company is trading at 14.4x projected 2021 earnings and 13.2x projected 2022 earnings. The dividend yield of 5.75% is mouth-watering in our current low-yield environment.
Philip Morris looks like a good bet to at least maintain its earnings as we move deeper into the 2020s. If it simply does that, shares would be a solid value. If it can grow at a CAGR of around 5% over the next decade? PM shares would have a lot of room to run. That scenario may not be likely, but it’s very possible.
Wall Street is Behind Philip Morris
Philip Morris has a consensus price target of $95.50, which is nearly 16% higher than the current share price. It has nine buy ratings, three hold ratings, and zero sell ratings.
If Philip Morris shares appreciate to $95.50, they would still be trading at under 17x projected 2021 earnings. That’s still a very reasonable multiple, all things considered.
How Should You Play Philip Morris?
Philip Morris shares rarely experience much volatility. There isn’t much game-changing news in the tobacco industry, after all. For the better part of the past two years, PM shares have bounced between around $60 and $85.
PM did, however, open up the month of December with a nine-session winning streak; shares went from around $75 to $85. PM shares stalled out around $85 though. It was a case of too much, too fast.
Look for a breakout above $86. It could be smooth sailing if that happens.
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