Should you buy Philip Morris shares instead of peers?

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we believe that Colgate-Palmolive Stocks (NYSE:CL) is currently a better choice than the tobacco giant Philip Morris shares (NYSE: PM) in the defensive consumer sector. While Philip Morris trades at a relatively higher valuation of 5.0x trailing earnings vs. 3.8x for Colgate-Palmolive
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this gap in valuation makes sense to some extent, especially given the tobacco company’s superior profitability, as discussed below.

Looking at stock returns, Philip Morris, down 1% over the past 12 months, has outperformed Colgate-Palmolive, down 7%, and the broader markets, with the S&P500 index down 10%. 15%. There’s more to the equation, and in the sections below we’ll discuss why we think CL stocks will outperform PM stocks over the next three years. We compare a whole range of factors, such as historical revenue growth, returns and valuation, in an interactive dashboard analysis from Philip Morris v Colgate-Palmolive: Which stock is a better bet? Parts of the analysis are summarized below.

1. Colgate-Palmolive’s sales growth has been better in recent years

  • Both companies have posted revenue growth over the past twelve months. Still, Philip Morris’ sales growth of 3.5% is slightly better than Colgate-Palmolive’s 2.3%.
  • However, over a longer period of time, Colgate-Palmolive is outperforming, with sales growing on average 3.9% per year to $17.4 billion in 2021, up from $15.5 billion in 2018, while Philip Morris’ sales grew just 2.1% on average to $31.4 billion in 2021, up from $29.6 billion in 2018.
  • Philip Morris sells its tobacco products in non-US markets. Revenue is generated from the sale of cigarettes and the flagship of the smokeless tobacco offering – IQOS. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic.
  • In late 2022, Philip Morris acquired more than 90% stake in Swedish Match AB in a $16 billion deal, which will strengthen its position in smokeless products.
  • Colgate-Palmolive is a leading manufacturer and distributor of household, healthcare, personal care and veterinary products, serving the global marketplace. It derives about 45% of its sales from oral care products.
  • It has also seen its sales rise in recent quarters based on price growth, partially offset by volume declines and currency headwinds. This trend is expected to continue in the near term, with a stronger dollar and a challenging macroeconomic environment.
  • Us Philip Morris Income Comparison and Colgate-Palmolive Earnings Comparison dashboards provide more insight into the turnover of the companies.
  • Looking ahead, both companies are expected to grow revenue at a similar rate over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 1.6% for both – Philip Morris and Colgate-Palmolive – based on Trefis Machine Learning analysis.
  • Please note that we have different methodologies for companies negatively impacted by Covid and those not or positively impacted by Covid when forecasting future earnings. For businesses negatively impacted by Covid, we factor in the quarterly revenue recovery trajectory to predict recovery to pre-Covid revenue percentage. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies that show positive sales growth during Covid, we consider annual average growth pre-Covid with a certain weighting for growth during Covid and the last 12 months.

2. Philip Morris is more profitable

  • Philip Morris’ operating margin of 35.4% over the last twelve months is higher than Colgate-Palmolive’s 16.1%.
  • This compares to 31.8% and 21.0% respectively in 2019, before the pandemic.
  • Philip Morris’ free cash flow margin of 36.9% is better than P&G’s 20.1%.
  • Us Comparison of Philip Morris operating income and Colgate-Palmolive Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Philip Morris’s 34.9% debt as a percentage of equity is much higher than Colgate-Palmolive’s 12.9%, while the 11.9% cash as a percentage of assets is higher than only 5.8% for the latter, implying that Colgate-Palmolive has a better debt position, but Philip Morris has more cash buffer.

3. The network of everything

  • We see that Colgate-Palmolive has shown better sales growth in recent years, has better leverage and is available at a relatively lower valuation. On the other hand, Philip Morris is more profitable and has more cash buffer.
  • Looking at the outlook now, on a P/S basis, due to the large swings in P/E and P/EBIT, we believe Colgate-Palmolive is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Philip Morris and Colgate-Palmolive over the next three years and points to a 10% expected return for CL over this period versus a 1% expected return for PM shares, implying that investors are better off buying CL than PM, based on Trefis Machine Learning analysis – Philip Morris v Colgate-Palmolive — which also gives more details on how we arrive at these numbers.

While CL stocks look like they could outperform PM stocks, it’s helpful to see how Peers from Philip Morris rate on metrics that matter. Other valuable comparisons for companies in different industries can be found at Peer comparisons.

In addition, the Covid-19 crisis has led to many price discontinuities which can provide attractive trading opportunities. For example, you’d be surprised how counterintuitive stock valuation is Philip Morris vs. Entergy

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