Philip Morris’ stock (NYSE: PM) lost about 12% of its value in the last 3 years, with the stock price dropping from $77 at the end of 2016 to $68
as of 18th May 2020. At the same time, Philip Morris’ revenues steadily increased from $26.7 billion in 2016 to $29.8 billion in 2019.
But how did the company’s stock suffer this beating with Philip Morris’ revenues seeing a corresponding increase of 12% in the
last 3 years? Well, of course there is a reason – it’s earnings (profits earned after all the expenses and taxes) and future growth outlook.
Turns out Philip Morris’ earnings margins (profits as a % of revenue) have seen a lot of volatility in recent years, with the margin falling
from 26% in 2016 to 24% in 2019.
One change – increased focus on heated tobacco products and providing incentives and discounts to push the same in the market. Philip Morris
ventured into the heated tobacco products in 2016, and since then has been offering deep discounts to customers and incurring significant
expenditure on research, promotion, and marketing of its brand IQOS. This strategy saw the company’s marketing, research and
administration cost rise from $6.4 billion in 2016 to $8.8 billion in 2019, reflecting an increase in MAR cost as a % of net revenue from 23.9%
in 2016 to 29.4% in 2019. Such a sharp rise more than offset any gains which the company recorded in the form of lower excise and cost of sales.
However, a combination of these factors – 12% increase in revenue and 8% fall in margins – meant earnings per share in fact saw a marginal
increase from $4.48 in 2016 to $4.61 in 2019.
Though, the market does not seem to be too impressed with this, with the company’s P/E multiple dropping from 17.3x in 2016 to 14.8x currently. The
reason is 2-fold: Philip Morris entered the US market (got FDA approval for IQOS in 2019) at a time when regulators are cracking down on
e-cigarette makers, while many developing nations have also spoken in favor of such a crackdown. Additionally, the outbreak of
coronavirus has affected US and Europe the most, one being a future market and the other an existing large market for Philip Morris. The
decline in P/E multiple reflects the markets’ subdued growth expectations for PM.