Philip Morris: FX A Transitory Risk, Solid Earnings Support The Big Yield (NYSE:PM)

The US Dollar Index rose above the 106 level last week, sparked by geopolitical fears, but also robust economic data at home. This could prove problematic for multinational companies over the coming months. For now, the first quarter reporting season is in full swing, and analysts expect solid EPS growth, assuming the usual aggregate beat on the bottom line by S&P 500 firms. Even slow-growth companies in the Consumer Staples space could benefit from rebounding corporate profits.

I reiterate a buy rating on Philip Morris International (NYSE:PM). EPS growth should verify well this year and next while its high free cash flow yield should support a continued high dividend yield.

Dollar Headwinds for MNCs, Including PM

Philip Morris International was spun off from Altria Group on March 28, 2008. It is one of the largest international cigarette producers with a share of 28% of the international cigarette/heated tobacco market. The company sports a market cap of $138 billion. Major combustible brands include Marlboro, Parliament, L&M, amongst others. It also is commercializing IQOS, a heat-not-burn product, in over 70 markets. Most of its sales are outside of the US.

Back in January, PM reported an EPS miss. Q4 non-GAAP EPS of $1.36 fell $0.09 shy of analysts’ expectations while revenue of $9.05 billion, up 11% from year-ago levels, was a small beat. It was the first bottom-line miss by the company since before Q1 2019. Not surprisingly, shares fell 2.7% in the following session.

For the year, though, the firm enjoyed organic EPS growth of 11%, and the management team saw 7-9% growth this year. Foreign exchange rates represent a key earnings challenge right now, but PM’s significant smoke-free sales climb and increased gross profits from such products are operational tailwinds. The EPS was indeed largely driven by unfavorable FX moves, though regulatory challenges remain key risks too.

FX May Hurt EPS by $0.11 in 2024

Looking ahead to next week’s Q1 report, data from Option Research & Technology Services (ORATS) show an implied stock price swing of 2.9% when analyzing the at-the-money straddle, and Seeking Alpha shows $1.41 of operating EPS forecasted.

On valuation, analysts at BofA see earnings rising by nearly 7% this year with closer to 10% per-share profit growth in the out years. The current Seeking Alpha consensus figures reveal slightly less sanguine EPS trends, but they are robust, nonetheless.

Dividends, meanwhile, are forecast to rise by $0.20 over the next 12 months, per BofA, with continued increases through 2026. With a forward multiple now under 14 and an EV/EBITDA ratio that is at a significant discount to the S&P 500, the valuation situation appears favorable.

Philip Morris Intl: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume non-GAAP EPS of $6.50 over the next 12 months and apply a 5-year average 15.7 forward P/E multiple, then shares should trade near $102, making the stock about 15% undervalued today. Also take a look at the forward PEG ratio below – it is at a material 19% discount to the long-term average. PM also yields more than twice that of the Consumer Staples sector. Versus my previous analysis last fall, the forward earnings multiple is down by nearly four handles.

PM’s Forward P/E Down 3.6 Turns From Fall 2023

PM: P/E History

Compared to its peers, PM features a solid valuation rating, though it is admittedly more expensive than say, BTI. Investors can often find similar firms in Europe that trade at least a few turns less expensive. Still, BTI’s fundamentals and valuation look good on their own. PM’s growth trajectory has been less than stellar, but the forward view is more sanguine. With superb profitability trends, share-price momentum has been weak and EPS revisions since the January earnings miss have been poor.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2024 earnings report before the open on Tuesday, April 23 with a conference call immediately after the numbers cross the wires. You can listen live here.

Corporate Event Risk Calendar

The Technical Take

With EPS growth ahead and Q1 numbers on tap, the technical situation remains neutral at best. Notice in the chart below that PM is in a downtrending triangle consolidation pattern. Key support is in the $83 to $89 range while the long-term 200-day moving average is negatively sloped, suggesting that the bears have some control over price action.

Also take a look at the RSI momentum gauge at the top of the graph – it had increased to above 70 last month – the highest since the middle of 2023 – after climbing seven consecutive sessions, but has since fallen under 40 in the previous pullback in price. I would like to see a rally above $97 on improved RSI momentum to confirm a breakout. Finally, a high amount of volume by price from about $85 to near $100 may keep PM shares trading around the area it is confined to today.

For now, support in the mid-to-high $80s remains in play while the downtrend resistance line is the spot to watch on the upside.

PM: An Ongoing Descending Triangle Pattern, Watching $97 Resistance

The Bottom Line

I reiterate a buy rating on PM. I see the stock as a strong value today with a solid yield. While earnings growth looks good over the quarters ahead, price action remains lackluster from the bulls’ perspective.