One of my favorite stocks in the consumer staple space, Philip Morris International (NYSE: PM) , just reported strong second-quarter results and raised its full-year guidance once again. The stock is up over 16% year to date and sports a nearly 5% yield.
Let's take a look at the tobacco company's most recent results and why the stock still looks like an attractive investment option.
Zyn continues to lead the way
Zyn continues to help power Philip Morris' results, with volumes for the nicotine pouches rising more than 50% to 149.9 million cans. Heated tobacco units (HTUs), which include its IQOS system, meanwhile, rose 13% to 35.5 billion units.
Traditional cigarette volumes edged up 0.4% to 43.5 billion units. However, the company did lose some cigarette market share in the quarter, falling 40 basis points to 23.6%.
Overall, organic revenue, which excludes currency impacts and acquisitions, rose 9.6% to $9.5 billion. Adjusted EPS in constant currency climbed 10.6% to $1.77.
On an organic basis, combustible tobacco revenue grew 4.8% driven by a high-single-digit increase in pricing. Smoke-free product revenue jumped 18.3%, also organically.
Gross margins increased by about 70 basis points to 64.7%. The company said that smoke-free gross margins rose by 220 basis points, while combustible gross margins increased 50 basis points. It was the first improvement in combustible gross margins after seven straight quarters of declines.
Image source: Getty Images.
Looking ahead, Philip Morris forecast 2024 organic revenue to grow by between 7.5% to 9%, up from a prior outlook of 7% to 8.5% growth. It is projecting adjusted EPS of $6.33 to $6.45. Excluding currency, it is projecting adjusted EPS of between $6.67 to $6.55, representing 11% to 13% growth, up from previous guidance for 9% to 11% EPS growth.
Management now expects volume growth of 1% to 2%, up from a prior outlook of 0% to 1% growth. It guided the company to generate about $11 billion in operating cash flow on a spending of $1.3 billion to $1.4 billion in capital expenditures (capex) , mostly for increasing capacity in the U.S. for Zyn.
For Q3, it is looking for adjusted EPS of between $1.77 and $1.82.
This was an excellent quarter from Philip Morris all around. Zyn continues to show strong growth despite experiencing some supply constraints, while IQOS has been performing well in its key European markets while gaining traction in Japan. The company also said that, while it's in its early days, its VEEV vaping brand has already become the closed-pod leader in five European markets and is on its way to profitability. The company will also be testing IQOS in its first U.S. market, Austin, Texas, in Q4. It expects to receive full FDA authorization in the second half of next year.
Just as importantly, Philip Morris is also starting to see improved gross margins. Zyn and IQOS have better unit economics and gross margins than traditional cigarettes, but the company also has begun to see a recovery in combustible gross margins as well.
The company pays a $1.30 quarterly dividend, which is good for a forward dividend yield of 4.7%. The company's projected $11 billion in operating cash flow easily covers the approximately $8 billion in dividends it pays out each year.
Is now a good time to buy Philip Morris stock?
Philip Morris has the unique quality of being a growth stock in a defensive industry. Zyn and IQOS remain solid revenue growth drivers that also come with higher margins. Zyn appears to have a long runway both in the U.S. as well as expansion into other markets. Meanwhile, the company has a solid opportunity in front of it with IQOS in the U.S. after buying back its rights. Given that the company doesn't sell cigarettes in the U.S., these would be all new users for the company.
Looking at valuation, Philip Morris trades at a forward price-to-earnings (P/E) ratio of under 16 times based on 2025 analyst estimates, as well as a PEG (price/earnings-to-growth ratio) ratio under 1. Given its both defensive and growth qualities, as well as its lack of cigarette exposure to the declining U.S. market, that looks like an attractive valuation in my book.
PM PE Ratio (Forward 1y) data by YCharts .
While the stock has performed well this year, I do not think it is too late to buy the name at current levels.
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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