Philip Morris International Shares Surge as Transformation Continues. Is It Too Late to Buy the Stock?

While investors in the tobacco space have tended to be more focused on dividends over the years, Philip Morris International (NYSE: PM) has quietly turned itself into a strong growth company as its smoke-free business continues to drive strong results. The company's shares were once again climbing following its fourth-quarter earnings results. The stock is now up around 20% year to date and about 60% over the past year, as of this writing.

With the stock near all-time highs, let's take a closer look at its most recent results to determine whether the stock is still a buy.

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Zyn continues to be a growth driver

Zyn, a brand of nicotine pouches made with nicotine powder and flavoring instead of tobacco that Philip Morris acquired at the end of 2022, continues to be Philip Morris' biggest growth driver. Zyn volumes surged 46.2% in Q4 to 183.8 million cans. Meanwhile, the company forecast Zyn volumes to grow between 34% to 41% in 2025, reaching between 780 million to 820 million cans.

The company also continues to see strong sales of heated tobacco units (HTUs), including its IQOS system. HTU volumes rose 5.1% to 35.7 billion units in the quarter. Excluding the net effect of estimated distributor and wholesaler inventory movements, volumes were up 13%, led by Japan and Europe. The company also highlighted the strength it was seeing in its VEEV brand vaping business, especially in Europe.

Traditional cigarette volumes also rose, increasing 1.1% to 152.8 billion units. Its market share excluding the U.S. and China edged down 0.1% to 23.5%, although its HTU market share rose 0.5% to 5.4%.

Overall, organic revenue, which excludes currency effects, acquisitions, and dispositions, rose 7.2% year over year to $9.7 billion. Adjusted earnings per share (EPS) climbed 14% to $1.55.

On an organic basis, combustible tobacco revenue rose 6.2%, driven by a high-single-digit price increase and modestly growing volumes. The smoke-free business saw organic revenue increase 9%.

Gross profits grew faster than revenue, rising 12.6% organically, as both Zyn and IQOS have higher gross margins than the company's traditional cigarette business. Adjusted gross margins for smoke-free products were 490 basis points higher than combustible gross margins in Q4.

Looking ahead, Philip Morris guided for organic revenue to grow by between 6% to 8%, with volume growth of around 2%. It expects smoke-free volumes to increase by between 12% to 14%. It is looking for adjusted EPS of between $7.04 to $7.17, which would represent growth of 10.5% to 12.5% in constant currency.

Data source: Philip Morris International.

It expects to produce operating cash flow of about $11 billion, while spending $1.5 billion on capital expenditures to expand Zyn capacity in the U.S.

Image source: Getty Images.

Is it too late to buy Philip Morris stock?

Philip Morris is a rare combination of a growth stock in a defensive industry. It also pays a robust quarterly dividend of $1.35, which is good for a forward dividend yield of 3.7% as of this writing.

Zyn continues to be Philip Morris' biggest growth driver, with the company seeing no signs of its volume growth slowing down. IQOS, meanwhile, is also seeing solid growth. Importantly, both have much higher unit economics than its traditional cigarette business, which is leading to earnings growth outpacing revenue growth as its gross margins expand. Meanwhile, with no exposure to the U.S. cigarette market, its cigarette business is still a solid grower through price increases and modest volume growth.

With the company having bought back IQOS rights in the U.S., it sees this as a nice opportunity in the next two to three years. Given that it does not sell cigarettes in the U.S., there would be no cannibalization like there is in international markets.

From a valuation standpoint, the stock trades at a forward price-to-earnings (P/E) ratio of just over 20 times based on the analyst consensus for 2025, with a PEG (price/earnings-to-growth ratio) ratio of under 0.4. Stocks with PEGs below 1 are generally viewed as undervalued, so a PEG that low puts Philip Morris squarely in undervalued territory.

PM PE Ratio (Forward) data by YCharts.

Despite the stock's strong performance, Philip Morris still offers investors the rare combination of growth in a defensive industry with a robust yield trading at an attractive valuation. As such, I don't think it is too late to buy the stock.

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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.