Friday, April 29, 2022

Philip Morris International Reports Q1 2022 Earnings ($PM)

[Recent posts: Morning Earnings: Philip Morris International Inc., Checking on Re-Nicotinization Thesis, Philip Morris Q2 2021 Earnings.]

Philip Morris International reported results for the first quarter last week. The current market capitalization at $101.40 per share is $157 billion. They have $30 billion of net debt which makes for an enterprise value of $187 billion. Earnings for Q1 were $2.15 billion net, which is a 5.5% earnings yield.

Some highlights:

  • "Net revenues increased by 9.0% on an organic basis, reflecting total volume growth driven by the underlying strength of IQOS, the ongoing recovery of the combustible business in many markets against a pandemic-affected comparison, and some positive timing impacts, including inventory movements."
  • "Net revenue per unit increased by 5.3% on an organic basis, driven by the increasing proportion of heated tobacco units in PMI’s sales mix, higher device sales and higher pricing. Pricing for combustible products increased by over 3%, or by around 6% excluding Indonesia."
  • "Net revenues from smoke-free products accounted for 31.2% of total net revenues. Pro forma total IQOS users at quarter-end estimated at approximately 17.9 million (up by more than one million versus December 31, 2021), of which 12.7 million had switched to IQOS and stopped smoking. As of year-end 2021, total IQOS users in Russia and Ukraine were estimated at approximately 4.8 million."
  • "On March 11, 2022, the U.S. Food and Drug Administration (FDA) authorized the marketing of the IQOS 3 tobacco heating system as a Modified Risk Tobacco Product." "The FDA concluded that the available scientific evidence demonstrates that IQOS 3 is expected to benefit the health of the population as a whole, taking into account both users of tobacco products and persons who do not currently use tobacco products."
  • 2022 guidance: "Operating cash flow of around $10 billion at prevailing exchange rates and subject to year-end working capital requirements. Capital expenditures of approximately $1.0 billion."
  • Russia/Ukraine exposure: "In 2021, Russia made up almost 10% of total shipment volumes and around 6% of PMI net revenues. In 2021, Ukraine accounted for around 2% of PMI’s total cigarette and heated tobacco unit shipment volume and under 2% of PMI’s total net revenues."

Cigarette volumes were up 1.9% versus the first quarter of 2021. The strongest region was South & Southeast Asia, which was up 7.4%. The weakest was Eastern Europe, which was down 7.3%. The biggest cigarette market for PM is now S&SE Asia, which has surpassed the EU due to the growth last year.

Heated tobacco units (reduced risk) were up 14.2% versus the first quarter of 2021. The biggest market is currently East Asia & Australia, with 9.3 million units sold. The HTU volumes in the EU grew 33% to 8.6 million units.

The guidance of $10 billion OCF and $1 billion of capex for the year would be $9 billion of free cash flow, which would be a 5% FCF/EV yield. 

As you can see, Philip Morris is considerably more expensive than Altria. The valuation premium exists because PM has a cigarette business that is still growing volumes and revenue, has a strongly growing reduced risk business ($9.4 billion of annualized sales that grew 10% over last year), is more geographically diversified, and in recent years has allocated capital better than Altria.

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