The pandemic-led stress and depression have resulted in a rise in the number of smokers. Amid growing concerns over health issues and strict FDA regulations, companies focused more on developing low-risk novel products like moist snuff, e-vapors, e-cigars, flavored tobacco products, and synthetic nicotine to meet the rising demand.

Philip Morris International Inc. (PM) and Altria Group, Inc. (MO) are two prominent tobacco manufacturers in the United States. PM manufactures and sells cigarettes, other nicotine-containing products, smoke-free products, and related electronic devices and accessories. It offers IQOS smoke-free products, including heated tobacco and nicotine-containing vapor products, and also develops a pipeline of inhaled therapeutics and respiratory drug delivery. In comparison, MO manufactures smokable products and oral tobacco products. MO is the parent company of Philip Morris USA (producer of Marlboro cigarettes).

The tobacco market is expected to grow at a 3.6% CAGR to reach $914 billion by 2027. Though supply chain issues and high prices remain matters of concern, the strong demand and continued innovation should help tobacco companies grow. So, both MO and PM should benefit.

While PM declined 1.1% year-to-date and MO surged 10%.  Which of these stocks is a better pick now? Let’s find out.

Latest Developments

On December 7, 2021, PM announced that it had been honored by the CDP’s ‘Triple A’ score for the second time, recognizing its best-in-class environmental performance and leadership in tackling climate change and protecting forests’ water security. The ranking should allow the PM to lead on environmental transparency and performance.

On December 7, 2021, MO announced that it had been recognized for a second consecutive year with a double ‘A’ rating for tackling climate change and protecting water security by CDP, a non-profit that runs a global disclosure system on managing environmental impact. This marks the company’s strong commitment to reducing its environmental impact, aligning operational and value chain business practices with a science-based methodology to limit the damaging impacts of climate change, and reducing the environmental impact of using its companies’ products.

Recent Financial Results

For its fiscal 2021 fourth quarter ended December 31, 2021, PM’s net revenues increased 8.9% year-over-year to $8.10 billion. The company’s adjusted operating income came in at $2.99 billion, up 4.5% from the prior-year period. While its net earnings increased 5.9% year-over-year to $2.09 billion, its adjusted EPS grew 7.1% to $1.354. The company had $4.50 billion in cash and cash equivalents as of December 31, 2021.

For its fiscal year 2021 fourth quarter ended December 31, 2021, MO’s net revenues came in at $6.23 billion. The company’s gross profit increased 5.4% year-over-year to $3.32 billion. Its adjusted EBIT came in at $2.68 billion, indicating a 9.2% increase from the year-ago period. MO’s adjusted net earnings came in at $1.99 billion, up 8.3% from the prior-year period. Its adjusted EPS increased 10.1% year-over-year to $1.09. As of December 31, 2021, the company had $4.54 billion in cash and cash equivalents.

Past and Expected Financial Performance

PM’s revenue and EBITDA have increased at CAGRs of 2% and 4.5%, respectively, over the past three years.

PM’s EPS is expected to decline 1.8% year-over-year in fiscal 2022, ending December 31, 2022, and rise 11.4% in fiscal 2023. Its revenue is expected to decline 2% year-over-year in fiscal 2022 and rise 5.9% in fiscal 2023. Analysts expect the company’s EPS to grow at an 8.4% rate per annum over the next five years.

MO’s revenue and EBITDA have increased at CAGRs of 2.5% and 6.9%, respectively, over the past three years.

Analysts expect MO’s EPS to improve 5% year-over-year in fiscal 2022, ending December 31, 2022, and 6.4% in fiscal 2023. Its revenue is expected to fall 0.3% year-over-year in fiscal 2022 and increase 1.5% in fiscal 2023. Analysts expect the company’s EPS to grow at a 5.4% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, PM is currently trading at 15.66x, 45.3% higher than MO’s 10.78x. In terms of forward EV/EBITDA, MO’s 9.43x compares with PM’s 12.16x.

Profitability

PM’s trailing-12-month revenue is almost 1.5 times MO’s. However, MO is more profitable, with a 58.2% EBITDA margin versus MO’s 44.8%.

Furthermore, MO’s levered free cash flow margin of 35.2% compares with PM’s 29.1%.

POWR Ratings

While MO has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, PM has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both MO and PM have an A grade for Quality, consistent with their higher-than-industry profitability ratios. MO’s trailing-12-month levered free cash flow margin of 35.2% is 734.6% higher than the industry average of 4.2%. PM has a 29.1% trailing-12-month levered free cash flow margin, which is 590% higher than the 4.2% industry average.

Of the 11 stocks in the B-rated Tobacco industry, MO is ranked #3, and PM is ranked #5.

Beyond what we have stated above, our POWR Ratings system has also rated PM and MO for Stability, Value, Momentum, Sentiment, and Growth. Get all PM ratings here. Also, click here to see the additional POWR Ratings for MO.

The Winner

Rising demand and the introduction of flavored and low-risk tobacco products should allow both PM and MO to grow substantially in the near term. However, relatively lower valuations and higher profitability make MO a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Tobacco industry.

PM shares were trading at $96.23 per share on Friday afternoon, up $2.29 (+2.44%). Year-to-date, PM has gained 2.67%, versus a -4.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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