Prediction: It's Time to Buy Philip Morris International Stock on the Pullback
Key Points
Philip Morris continues to see strong growth, powered by Zyn and Iqos.
However, investors disliked that the company turned up promotions late in the quarter to boost Zyn volumes.
The stock is currently attractively valued with a solid yield as well.
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After a strong start to the year, Philip Morris International's (NYSE: PM) stock has pulled back as investors have become more nitpicky about its quarterly earnings results. The stock is now just up over 20% on the year.
Let's take a closer look at the company's third-quarter results and why I think this pullback is a great opportunity to buy the stock.
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Image source: Getty Images.
Zyn continues to power results
Zyn, which is Philip Morris' popular nicotine pouch brand, continues to be its biggest growth driver. U.S. shipments climbed 37% in Q3, while retail sales volumes (offtake) soared by 39%. Offtake growth accelerated in the last month of the quarter to 58% in September. Global shipments, meanwhile, climbed 36%, while growth outside the U.S. and Nordic countries more than doubled.
The rest of Philip Morris' smokeless portfolio also continued to see solid growth. Sales volumes of its heated tobacco units (HTUs), including its Iqos system, jumped 15.5% to 40.8 billion units. The product continues to see strong growth both in Japan and Europe. Its e-vapor product, Veev, saw shipments surge 91% to 900 million units, and it held the No.1 market share in eight countries.
Traditional cigarette volumes, meanwhile, fell by 3.2% to 157.9 billion units, although the company saw better results in Turkey, which has been dealing with supply chain issues, than it expected. Segment organic revenue edged up 1% to $6.4 billion, and gross profits climbed 4.8% to $4.3 billion as increased price hikes more than made up for volume declines.
Overall, organic revenue, which excludes currency effects, acquisitions, and dispositions, rose 5.9% year over year to $10.8 billion. Adjusted earnings per share (EPS) climbed 17.3% to $2.24.
| Oral Products (Includes Zyn) | HTUs | Cigarettes | Smoke-Free | Total | |
|---|---|---|---|---|---|
| Volume growth | 16.9% | 15.5% | (3.2%) | 16.6% | 0.7% |
| Organic revenue growth | N/A | N/A | 1% | 13.9% | 5.9% |
HTUs = heated tobacco units.
Management kept its full-year guidance for organic revenue while slightly increasing its adjusted EPS forecast. It continues to expect strong shipment growth from both Zyn and Iqos but expects a decline in traditional cigarette volumes.
| Metric | Prior Guidance | Updated Guidance |
|---|---|---|
| Organic revenue growth | 6% to 8% | 6% to 8% |
| Adjusted EPS | $7.33 to $7.46 | $7.46 to $7.56 |
| Adjusted EPS growth* | 11.5% to 13.5% | $12% to 13.5% |
| Volume growth | 1% | 1% |
Data source: Philip Morris International. *Adjusted EPS growth excludes currency exchange impacts. EPS = earnings per share.
Why the stock fell and why investors should buy the dip
Philip Morris turned in strong results and slightly raised earnings guidance, but investors disliked how the company increased promotions late in the quarter to boost Zyn volumes. The company made around a $100 million investment in the quarter that included offering free Zyn cans to adults who purchased other nicotine products in order to increase brand awareness.
The company said most of the people who took up the offer were smokers and vapers, and that the free cans only accounted for a single-digit percentage of its shipments in the quarter. While Zyn has had a lot of buzz, that's not a bad promotional strategy to try to win over users of other nicotine products. Meanwhile, Zyn promotional activity has been exceptionally low prior to this quarter because it was dealing with supply constraints.
Zyn is still seeing great shipment growth and still has much better margins than traditional cigarettes, so it will continue to be a profit driver for the company moving forward. Iqos also continues to perform well, and the company continues to wait for FDA approval of its new ILUMA delivery system before a full launch in the U.S. Once approved, this has the chance to be another nice growth driver for the company.
From a valuation perspective, Philip Morris' stock is trading at around a forward price-to-earnings (P/E) ratio of under 18, based on the analyst consensus for 2026, with a price/earnings-to-growth (PEG) ratio of under 0.7. Stocks with positive PEG ratios below 1 are typically considered undervalued. It also has a forward yield that is just a tad below 4%.
That's too cheap a valuation for a company that has one of the best growth profiles of any large-cap consumer staples stock. As such, this looks like a great time to buy this defensive growth stock while it's down.
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Geoffrey Seiler has positions in Philip Morris International. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
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