Philip Morris International stock is up over 27% this year, despite a slump in the last month. It has comfortably outperformed the S&P 500, but investors are now wondering if the outperformance is sustainable. We believe it still has a lot of upside heading into the next year, despite markets being near their all-time highs.
Philip Morris International Inc. is a global tobacco company that manufactures and sells cigarettes, other tobacco products, and smoke-free products. The company is gradually shifting to a smoke-free future by focusing on reduced-risk products, including heated tobacco and e-vapor products.
PMI is dedicated to Reduced-Risk Products (RRPs) and plans to ultimately phase out cigarettes by 2030. The firm channels a lot of resources into the research and development of this segment as it is the only focus point for its business apart from consumer tobacco products.
Its leading products include cigarette brands like Marlboro, Parliament, L&M, and Chesterfield, heated tobacco products, e-vapor products, oral nicotine products, and wellness products.
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PM’s revenue sources are being increasingly shifted to healthier alternatives, with approximately 38% of total net revenues coming from smoke-free products as of mid-2024. Its typical customers are wholesalers and retailers, including Walmart, 7-Eleven, and Carrefour. Other customers include tobacco industry distributors like McLane Company and Core-Mark. The company operates in nearly 180 markets worldwide, having major sales in Europe, Asia-Pacific, and the Americas. Its end markets are slowly changing as it moves from traditional tobacco to smoke-free solutions.
Philip Morris International’s great run this year was triggered by improving fundamentals at the start of this year. For the upcoming quarter, analysts expect a 6% YoY revenue growth landing at $9.69 billion. While most of the increased earnings potential is priced in, there is reason to believe that the valuation still hasn’t expanded in the same proportion as the company’s earnings. The company’s forward PE ratio of 17.7 trades at a massive discount to SPY’s PE ratio of 23. This shows that despite this year’s outperformance, the company continues to trade at a low valuation, primed for upside on any positive trigger.
Moreover, the company’s nicotine pouches have increased in popularity this year, with a severe shortage in the peak summer months. The nicotine pouches have received better social acceptance compared to cigarettes and chewing tobacco. This will not only help the company make more money but may also convince those investors to invest in the stock who consider it a ‘vice’ stock. In short, with increasing earnings and improved products, PM continues to remain a solid bet for the next year as well.
Philip Morris International is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held PM at the end of the second quarter which was 64 in the previous quarter. While we acknowledge the potential of PM as a good investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as PM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.