Many investors view cigarettes as a highly unethical investment. There is reason to be wary of tobacco-related stocks from an ethical perspective, and Philip Morris’ (PM) valuation multiple certainly reflects this.
Additionally, cigarette stocks are battling a number of headwinds right now. Decisions by the U.S. government could make owning cigarette companies as unprofitable as they may be unethical, and long-term investors don’t like this. The government’s recent proposal to reduce the amount of nicotine in cigarettes to levels at which they’re not addictive has sent cigarette stocks plunging.
Despite these obstacles, Philip Morris has outperformed its peers during this difficult period. Here’s why. (See Philip Morris stock analysis on TipRanks)
Superior Business Model and Geographic Focus
Philip Morris does not sell or market cigarettes in the U.S. Rather, the company’s portfolio of brands, including Marlboro cigarettes, are focused on emerging markets, where smoking is declining at a slower rate than in the U.S.
It appears this targeted strategic move has paid dividends for the company in more ways than one. Shares of Philip Morris are up substantially since the government announcement about reducing nicotine levels, while its peers have lagged significantly over the past month.
Additionally, it has recently been reported that Philip Morris is eyeing opportunities in the cannabis space. Shifting away from harmful, addictive cigarettes toward what many view as essential and constructive medicinal alternatives makes a lot of sense to many investors.
Given the size and scale of Philip Morris’ existing production capacity, shifting some production toward cannabis pre-rolls or other value-added products seems to be practical. With the right partnership and political backdrop (cannabis isn’t yet legal for recreational use under federal law in the United States, but is so in a growing number of countries globally), such an investment could pay off handsomely over the long run.
Philip Morris Stock Isn’t Without Risk
That said, as with any investment, it’s important to assess the underlying risks in PM stock. Indeed, Philip Morris’ core profile makes it untouchable for many large institutional funds and portfolio managers with ethical mandates. PM stock remains on the fringes of what is viewed as a respectable investment today.
Additionally, the Biden administration’s proposed limit on nicotine levels could set the stage for other countries to follow suit. Such a move would certainly hamper Philip Morris’ long-term growth prospects. Investors have valid reason to sleep uneasy at night on this announcement.
Furthermore, given the prevailing negative attitude toward nicotine, many view Philip Morris’ potential move toward cannabis as an essential long-term strategic shift, rather than a short-term earnings-boosting endeavor.
What Analysts Are Saying About PM Stock
According to TipRanks’ analyst rating consensus, PM stock comes in as a Strong Buy. Out of 8 analyst ratings, there are 7 Buy and 1 Hold recommendations.
As for price targets, the average analyst PM price target is $109.38. Analyst price targets range from a low of $105.00 per share to a high of $114.00 per share.
Bottom Line
The direction in which Philip Morris has already headed toward becoming a more favorable cigarette player is commendable. Over the near- to medium-term, the company’s geographic positioning is likely to provide some downside protection.
Over the longer term, if Philip Morris can make the transition toward health-focused cannabis operations, investors may view this stock more favorably.
It’s okay not to like Philip Morris’ current business model. However, the company’s activities in ten or twenty years from now appears to be open season. There is room for investors to be excited about that.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
