Philip Morris International

Philip Morris reported 7.6% organic revenue growth in the second quarter and 13.6% adjusted EPS growth excluding currency impacts. International smoke-free grew 11.8% organically, and international combustibles grew 6.4%. The US declined 0.9%, better than the first quarter's 32% fall.

Why it matters: First-half performance was strong, particularly as international combustibles volume grew 1%, bucking the secular decline trend. Moreover, while the US business has been a drag in recent quarters, we're optimistic that innovations aided by favorable regulation should reaccelerate Zyn sales. The international combustibles business continues to be a cash flow machine amid robust price increases, so the surprise volume growth is encouraging. Meanwhile, the international smoke-free business benefited from the strength of QIOS, as underlying consumption grew another 5%. We think the launch of new flavors, lower nicotine variants, the Zyn Ultra line, and the modified risk tobacco product approval significantly improve Philip Morris' competitiveness in the US nicotine pouch market. The firm is also boosting investment, which should reinvigorate revenue growth.

The bottom line: We expect to increase our $171 per share fair value estimate by a mid- to high-single-digit percentage for wide-moat Philip Morris. Shares were up 3% on the results and should look fairly valued after our increase. Our increase should stem from an upgraded growth trajectory for US Zyn, as we think recent enhancements should help protect its 60% market share from robust competition. We also expect to increase our long-term growth assumption to better reflect PM's significant lead in reduced risk. From a valuation perspective, the market largely expects Philip Morris to continue to deliver robust growth, as do we. As such, we think it would take an acceleration in reduced-risk category growth or a longer-lasting deceleration in combustibles decline to justify a higher share price.

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After incorporating second-quarter results, we are increasing our fair value estimate to $185 per share from $171. Our increase stems from an increased long-term growth assumption to better reflect PM's significant lead in reduced risk, boosted by an upgraded growth trajectory for Zyn. We think recent enhancements should help protect its leading US market share from robust competition. This is reflected in an increase in our terminal multiple assumption of 14.4 times EBITDA (from 13.3).

Philip Morris reported 7.6% organic revenue growth in the second quarter and 13.6% adjusted EPS growth excluding currency impacts. International smoke-free grew 11.8% organically, and international combustibles grew 6.4%. The US declined 0.9%, better than the first quarter's 32% fall.

Our valuation implies a 2027 price/adjusted earnings ratio of 19.5 times, an enterprise value/adjusted EBITDA of 15.3 times, and a 3.1% dividend yield. These multiples are at the higher end of the tobacco peer group, given the better long-term growth prospects that PMI boasts from its reduced-risk portfolio.

Over our five-year forecast period, we forecast average annual volume growth of 10% for heated tobacco and 6% for oral smoke-free products. Combined with a 2.4% average annual volume decline for cigarettes, we forecast total company volume to grow 1% per year.

PMI’s pricing power leads us to forecast mid-single-digit price increases in its international combustibles segment. While we forecast low-single-digit price increases for its US and international smoke-free segments, these segments enjoy a higher price per pack (about 2.5 times for heated tobacco compared with cigarettes), bringing mix tailwinds to the top line. In total, we forecast organic top-line growth of about 5% per year over the next five years.

We forecast adjusted EBITDA margin to reach 48% by 2030, up from 42.7% in 2025 and slightly above historical highs. Margin expansion largely stems from the benefits of scale from Philip Morris' reduced-risk portfolio as volume grows and overhead costs are scaled.

Beyond our five-year explicit forecast, we assume a terminal EBITDA multiple of 14.4 times to value future cash flows, based on medium-term growth of about 5% and long-term growth of 1.7%. We refrain from using Morningstar’s standard methodology, given the long-term secular decline of tobacco. Our multiple is at the high end of our coverage, reflecting PMI’s leading position in heated tobacco.

We explicitly include one ESG risk in our forecast, as we expect the adverse health effects of tobacco and nicotine to lead to long-term consumption declines. We also include one other ESG risk in our uncertainty rating around the product governance risks for PMI's fare. This includes both marketing, especially as cigarette alternatives are marketed as lower-risk, as well as product quality and safety, since PMI’s offerings are for human consumption. Still, we view these risks as possessing low likelihood and materiality.

We assign Philip Morris International a Wide Morningstar Economic Moat Rating based on intangible assets and cost advantage. We forecast returns on invested capital to average nearly 29% over the next five years, well above our roughly 7% estimate of the company’s cost of capital. Even if cigarette volume declines faster than the 1% global annual rate that we forecast, we see ample room for excess returns.

First, tobacco contains nicotine, an addictive substance that keeps customers coming back and suppresses the cessation rate despite adverse health effects. According to Tobacco Atlas data, more than 60% of all smokers intend to quit, and 42% have attempted to quit over the past 12 months. Yet in most markets, the smoking rate is only in a very modest decline, implying that most attempts to quit fail. Academic research (Lewis and others, 2015) has shown that while cessation rates are not correlated with consumer brand loyalty, premium price segments are associated at a statistically significant level with lower cessation rates. According to company disclosures, PMI has the heaviest skew to the premium segment among the large-cap cigarette manufacturers with leading brands Marlboro and Parliament, with around 55% of its OECD volume in premium segments, benchmarked against roughly 25% for the industry in aggregate.

Moreover, consumers exhibit brand loyalty. One academic study (Nogueira and others, 2018) found that 86.6% of smokers had a preferred brand, with 44.4% saying they had a “lot of” loyalty to their brand. Far more stated taste (83.2%) rather than price (51.7%) as driving their preference. This is even though blind taste tests have observed that most smokers cannot distinguish brands (DeCicca and others, 2021). The addictiveness and strong brand loyalty lead to robust pricing power. As evidence, PMI’s price increases outpaced its volume decline of less than 1% annually from 2020 to 2025.

We believe that regulations have virtually entrenched market leaders like PMI. Tobacco advertising is severely restricted in most markets, with bans on most forms of mass marketing. This makes it difficult for new entrants to gain the attention of smokers and damps competition among incumbents. Volume shares have been very stable for decades, primarily, we believe, because the lack of marketing has discouraged switching. PMI has been the only cigarette maker to increase its market share organically—but by just 30 basis points—on a global basis excluding China since 2008. On average, consumer products manufacturers in more competitive categories spend roughly a high-single-digit percentage of sales on marketing. Big Tobacco manufacturers have historically spent a low-single-digit percentage of sales on advertising (although we expect next-generation products to require greater spending). Some other regulations may also have had the unintended consequence of limiting competition in price and creating a barrier to entry. Point-of-sale display bans create a disincentive to engage in promotional strategies.

In the US, the Food and Drug Administration has imposed restrictions on marketing new or modified products. Tobacco products introduced or modified after March 22, 2011 (Aug. 8, 2016 for some small tobacco categories) require premarket review by the FDA unless the manufacturer can prove that the products are “substantially equivalent” to products commercially available on Feb. 15, 2007. Products or modifications deemed not to be substantially equivalent may only be brought to market in the US following FDA review and approval. The substantial equivalence rule makes it difficult for new entrants and reduces the financial burden of investing in new products that is critical for other consumer industries. PMI has an application to market Iqos as a modified-risk tobacco product. Although a full US launch has been delayed, we don’t think this threatens its eventual launch (likely in late 2026 or 2027) or its success.

PMI is the largest cigarette manufacturer in the world, with a 2025 volume of 607 billion sticks, creating a cost advantage. Japan Tobacco, British American Tobacco, and Imperial follow with 564 billion, 465 billion, and 187 billion, respectively. Altria’s single-market exposure to the US limits its volume to just 62 billion sticks. We see economies of scale benefits, given the homogeneity of cigarettes. We estimate PMI’s operating cost per pack of cigarettes at $0.49, compared with $0.47 for BAT, $0.49 for JT, $0.59 for Imperial Brands, and $0.88 for Altria.

Despite secular volume decline of cigarettes, we remain confident that PMI’s competitive advantage can last for the next 20 years. PMI’s pricing power has allowed it to offset the volume decline. We expect there is a tipping point at which price elasticity would increase. For example, in Australia, since 2011, tax increases doubled the retail price of cigarettes in just six years, which in turn led to the smoking rate falling from 16% to 13%. A pack of 20 cigarettes (equivalent; a standard pack contains 25 sticks in Australia) now costs approximately $40, according to a survey by Tobacco in Australia, well above the roughly $21 average retail price in the UK, $10 in the US, and roughly $4 on average globally, according to the World Health Organization. Assuming Australia is applicable to other markets and 4% real pricing increase, it will be into the 2060s before global pricing reaches levels at which price elasticity increased in Australia.

The threat of material value destruction is low probability, in our view. For example, in 2022, New Zealand passed a law that effectively banned anyone born in 2009 or later from purchasing cigarettes for life, reduced nicotine content by 95%, and reduced the number of tobacco retailers by 90%. A new government repealed the ban in 2024, arguing that prohibition would lead to the rise of an illicit market. We believe future regulation is likely to be incremental rather than bans.

PMI’s international operations give it exposure to countries where cigarette consumption is either declining slower than the global rate or even growing.

Having acquired the rights to sell Iqos in the US, PMI is set to gain significant incremental revenue, since it does not sell traditional combustibles in this market.

With approximately 25% global market share (excluding the US and China), PMI is the world's largest publicly traded tobacco company by volume. Its scale, customer loyalty to Marlboro, and addictive products afford meaningful pricing power.

PMI’s international exposure creates significant currency risk, with most of its net sales derived in foreign currencies and about one-fourth of its input costs in dollars. A strengthening US dollar can have a material negative impact on earnings growth.

The success of Zyn has attracted attention from competitors that are intensifying efforts to topple PMI's dominance. Increased promotional activity is likely.

With cigarette volume in secular decline, multiple nicotine alternatives are emerging, limiting the scale and profitability potential of each emerging category.