Philip Morris International
stock is climbing Wednesday after the tobacco company notched its second upgrade in less than a week. Yet Barron’s readers already knew that the market was due to get more fired up about the stock.
Goldman Sachs analyst Bonnie Herzog boosted her rating on Philip Morris stock (ticker: PM) to Buy from Neutral, while raising her price target by $25, to $120.
She writes that while she has always admired the company’s “best-in-class long-term growth prospects in reduced-risk product (RRP) development” she had previously been sidelined by concerns about disruption from the war in Ukraine, exchange-rate headwinds, and a semiconductor chip shortage—impacting its heat-not-burn IQOS product—along with a general lack of catalysts.
Now, however, many if not all of those issues have been resolved, and the U.S. rollout of IQOS is a big catalyst to come.
“We performed an in-depth analysis of the U.S. nicotine market (which increases Philip Morris’s total addressable market by 60%) and, in our base-case scenario, we believe Philip Morris can comfortably reach a 10% share of the U.S. combustible and heat-not-burn market by 2030,” Herzog writes. By her math, that will translate into an incremental $17 per share of value for the company.
“Ultimately we see a long runway of accelerating revenue and profit growth ahead fueled by the tremendous compounding effect of IQOS’s razor/razor blade model,” she notes, along with the company’s ongoing development of other RRP products, bolstered by technologies and capabilities it acquired from takeovers of both Swedish Match and Fertin.
Philip Morris stock is up 1.4% in early trading to $102.75.
That puts the stock 1.7% above where Barron’s recommended it at the start of the year, just behind the
‘s 1.9% gain over the same period. Philip Morris has gained 7.5% since we argued it looked more attractive than
(MO) in September, while the latter is down 0.8%.
Barron’s noted a lot of the same factors that Herzog likes, from IQOS’s potential in the U.S. to widening margins. As she writes, “the average unit margin on cigarettes in the U.S. is more than three times greater than Philip Morris’s global average cigarette margin.”
Moreover any bad news for U.S. cigarette sellers—from a potential ban on menthol to a required reduction in nicotine levels—would be good for Philip Morris. Not only does the company not sell traditional cigarettes domestically, but such moves would likely push users to toward smokefree products in general, and perhaps IQOS specifically, given its broad global success.
Certainly not all combustable cigarette alternatives are created equal. In fact just yesterday the Food and Drug Administration issued marketing denial orders for two menthol e-cigarette products currently marketed by
British American Tobacco
(BTI) unit R.J. Reynolds Vapor Company after determining that they don’t meet public health standards.
However we aren’t the only bulls. On Thursday, Jefferies analyst Owen Bennett also upgraded Philip Morris to Buy from Hold, and bumped his price target up to $118 from $86.
His optimism stems from his—and Barron’s—belief that Philip Morris “is leading the shift over to the tobacco model of the future” thanks to its dominance in RRPs.
That means 62% of analysts are now bullish on Philip Morris—the highest proportion since February 2022 when Russia invaded Ukraine, creating havoc for many multinational corporations.
The stock may still convert more holdouts in the future, as consensus estimates have been rising and the stock has gained about as much as Altria has lost so far this year.
Philip Morris will soon invite Americans to take a drag from its blockbuster IQOS product, but the stock should be anything but for investors’ portfolios.
Write to Teresa Rivas at firstname.lastname@example.org