Despite their reputation as “sin stocks,” tobacco company stocks have historically enjoyed considerable popularity among investors. Many investors like them for their high margins, robust cash flow, and the high dividends they typically pay. That outsized interest helps explain why more than a few analysts are optimistic about the sector.
Mainstay of the tobacco industry Philip Morris International (NYSE: PM) was the subject of a recent research note. The report concluded that the stock was unquestionably a buy at its current price.
Remains in the bullpen
The analyst behind the note was Bonnie Herzog from Goldman Sachs. She published an update on Philip Morris following the most recent publication of the quarterly figures. In her note, Herzog kept her buy rating and price target of $118 per share intact. That indicates an increase of 24% over the next twelve months compared to the current price.
The tobacco company performed well in the first quarter of 2024, posting notable revenue and profitability growth, exceeding analyst consensus expectations on both measures. This was due in no small part to solid profits with IQOS, a product in which the tobacco is heated instead of burned. Management is clearly optimistic about the future, as it has raised its expectations for both revenue and earnings.
Herzog wrote: “Ultimately, we believe that management’s decision to raise guidance so early in the year is positive and suggests that management has a good understanding of its business.”
Transition from the traditional
In its earnings release, Philip Morris spent quite a few words discussing the growth of its smoke-free (SFB) business, not least because such products now make up 39% of the company’s sales.
It appears that Philip Morris is making the transition quite smoothly from a supplier of traditional tobacco cigarettes to products that are considered safer for the world and less harmful to users. After a period of downturn, the all-important free cash flow (FCF) figure is also rising, meaning there’s plenty of funding for that ever-rising high-yield dividend. For people who don’t mind owning controversial stocks, Philip Morris seems like a good buy these days.
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Eric Volkman has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Goldman Sachs Group. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
Philip Morris Stock is up 24%, according to 1 Wall Street analyst, originally published by The Motley Fool
