Philip Morris International Inc

Weekly Valuation: Philip Morris International Inc  — Valutico | 27 May 2022

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Summary

Philip Morris is internationally known primarily for its «Marlboro» brand. Due to the worldwide decline in cigarette consumption and the critical view of the health authorities on the market, the US company has been trying for years to increase the share of so-called smoke-free products. These include nicotine pouches, where Swedish Match is well positioned. In 2021, smoke-free products accounted for almost two-thirds of sales.

Takeover in Sweden worth billions

The US tobacco company Philip Morris International is expanding its range of smokeless products and acquiring the smaller European competitor Swedish Match. The company manufactures snus, nicotine pouches, moist snuff, tobacco- and nicotine-free pouch products, chewing tobacco, chew bags, tobacco bits, cigars, matches, and lighters.  Philip Morris is offering 106 kronor per share (10.30 euros) for the Swedish company, according to a statement on Wednesday. That is 40% more than Monday’s closing price.

The company is valued at about $16 billion in the deal. Swedish Match’s board of directors recommended that shareholders accept the offer.

Swedish Match’s shares rose nine per cent to 103.55 Swedish kronor on Wednesday morning. The previous day, the shares had already risen 25 per cent on the Stockholm stock exchange after the takeover plans were announced. The analysts of the US bank JP Morgan consider it very likely that the deal will go through.

New, ESG-oriented strategy

Philip Morris International has announced in its latest annual report that it intends to become more sustainable. The redesigned ESG framework provides for two distinct thematic pillars: The Product Impact Pillar (including issues related to PMI’s products) and the Operational Impact Pillar (including issues related to PMI’s business operations). This distinction forms the basis of PMI’s new sustainability approach, which consists of eight clear, impact-oriented strategies aimed at addressing key ESG issues.

Analysts seem to think that the above approach will pay dividends in the future, as the consensus average sales growth over the next five years is expected to be roughly double that of its competitors (i.e. British American Tobacco, Altria Group, and Imperial Brands). 

Due to the divergence in analyst estimates for PMI vs its peers, our Income approach (using the WACC of 5.5%) produces a valuation of almost double that of the Peer approach, with the current market cap being exactly in the middle of the two results. This could imply that investors are adding an implicit ESG premium to their WACC calculation and that the true WACC being applied by investors is much higher. The discrepancy could also be explained by the fact that many investment managers are specifically prohibited from investing in tobacco companies and thus the demand for this type of stock is subdued.

Interestingly, our Transaction multiples approach produces a valuation almost exactly in line with the current market cap.

From the above our view is that PMI is likely fairly valued as of today, however, if its acquisition and ESG strategies pay off and it achieves the sales figures anticipated by analysts, it could offer some value at the current price level.

Full valuation: click here