After conducting a survey of next-generation products users in Japan, the U.S. and the U.K., Credit Suisse analyst Alan Erskine downgraded Philip Morris (PM) to Underperform to account for lower heated tobacco products growth and lower combustible organic growth. The analyst argued that Philip Morris’ premium valuation reflects “overly optimistic” heated tobacco products expectations.
SURVEY SAYS: In a research note this morning, Credit Suisse’s Erskine told investors that he has conducted a new proprietary survey of next-generation products users in Japan, the U.S. and the UK. Slower progress in the take-up of Heated Tobacco Products and weaker combustible organic growth challenge the high-single-digit earnings per share growth models of British American Tobacco (BTI) and Philip Morris, while e-vapor exposure favors Imperial Brands (IMBBY), he contended. The analyst estimates global heated tobacco products potential at 140B sticks, compared with 250B-500B implied by Philip Morris’ 2025 aspirational target. In Japan, Erskine noted he sees category share capped at 25%, with flat volumes from 2019 owing to high dual use among older Japanese heater tobacco products users. IQOS should continue to lose share, the analyst argued, adding that outside Japan, potential upside looks limited to markets with sizeable menthol, low-strength and premium/mid-price cigarette segments. Erskine told investors that he prefers Imperial Brands given lower risk, and NGP upside geared by relatively smaller tobacco business. Additionally, he believes British American Tobacco is attractively valued, but thinks near-term upside is capped by high leverage, U.S. regulatory uncertainty and weak heated tobacco products in Japan.
SELL PHILIP MORRIS: Credit Suisse’s Erskine downgraded Philip Morris to Underperform from Neutral and lowered his price target on the shares to $74 from $92, as he believes the stock’s premium valuation reflects “overly optimistic” heated tobacco products expectations. The analyst also reduced his 2019-2022 organic growth estimates by 110bps to 3.6% to account for lower heated tobacco products growth and lower combustible organic growth and cut his average constant-FX 2019-2022 earnings per share growth by 130bps to 5.2%. While Erskine regards Philip Morris as best-in-class in consumer staples, he believes its dependence on heated tobacco products as the next-generation product of choice globally exposes it to significant downside risk. Older smokers are the key driver of further heated tobacco products growth in Japan and his 2018 Tobacco Consumer Survey suggests they are predominantly dual users of heated tobacco products and appear to have equal preference for IQOS and Ploom TECH, the analyst pointed out. Erskine argued that these dynamics make for a weak setup for Philip Morris and thinks category penetration will peak at 25% in 2022E, with volumes flat from 2019. He expects IQOS to continue to lose share, which means in-market sales will have peaked in 2018.
PRICE ACTION: In morning trading, shares of Philip Morris have dropped almost 3% to $79.00.
Imperial Brands
+ (+0.00%)
British American Tobacco
+0.02 (+0.06%)
Philip Morris
-2.15 (-2.64%)