Philip Morris: Focus On Zyn (NYSE:PM)

Funding Thesis

Philip Morris Worldwide (NYSE:PM) is redefining its identification from a standard cigarette producer to a pacesetter in smoke-free merchandise. The acquisition of Swedish Match, notably its Zyn nicotine pouches, performs a pivotal position on this transformation, with U.S. volumes up by over 50% year-to-date as of Q2, marking a considerable enhance in class share​​. Zyn, with a robust market presence and speedy progress, is central to PMI’s technique in navigating the evolving panorama of nicotine merchandise. With Zyn’s US adoption and progress wanting compelling, buyers ought to reassess the inventory. The ahead PE a number of and dividend yield makes the corporate compelling.

Background on Philip Morris “Smokeless Transformation”

In a landmark transfer, Philip Morris acquired Swedish Match for $16 billion in late 2022, a method aligning with the business’s shift in the direction of various nicotine merchandise​​. This acquisition is not only a monetary funding however a step in the direction of diversifying past conventional cigarettes, as evidenced by PMI’s improvement of merchandise just like the IQOS heated-tobacco system and acquisitions like Vectura Group and Fertin Pharma​​.

Massive cigarette corporations (comparable to Altria and Philip Morris) are embarking on a multi-year transformation plan to assist people who smoke stop cigarettes and transition to smoke free nicotine merchandise. Whereas they nonetheless have the purpose of their prospects forming habits round nicotine merchandise, these new merchandise are being offered as much less dangerous options permitting the agency to restrict future legal responsibility from customers hurting themselves by consumption. At the moment Zyn has been experiencing exponential progress, reaching over $800 million in gross sales in Q3 alone (Q3 Earnings Name).

Why Zyn Sells to Gen Z (and why this issues)

Zyn’s market technique aligns properly with the values and habits of Technology Z, a demographic that holds rising buying energy and affect​​. Zyn is widespread on social media, with media personalities speaking about how Nicotine could be for you (Andrew Huberman Podcast)​​. Some members of Gen Z are viewing Zyn as a comparatively innocent product as conventional smoking declines.

As somebody who’s Gen Z, I see the presence of Zyn amongst folks I went to school with, and loosely in buddy teams (to this point). Folks see Zyn as a gum-like product & the case it is available in doesn’t have the social stigma like tobacco merchandise. It is also not a smoking product that means there are much more social scenes the place it might be permissible to devour Zyn.

Gen Z has been a hard marketplace for conventional tobacco corporations to go after. Zyn provides one probably the most compelling methods to promote to this age group. With a worth level of simply $3.99 for the smallest container, there doesn’t seem like a big worth barrier for youthful customers to purchase the product. This compares to the value of a field of cigarettes which fits for $7.19 and vape merchandise, which go for ~$15 up entrance for a Vape Pen.

How you can Worth Zyn (as A part of Philip Morris)

Zyn’s worth to PMI could be assessed by its market share and gross sales progress. Zyn holds a 64.9% share of the U.S. nicotine pouch market, with important progress noticed in cargo volumes and gross sales​​​​​​​​​​​​​​​​. This dominance in a quickly rising market section is a key asset for PMI.

Phillip Morris’s valuation is corresponding to its friends however has a division that’s distinctive in its stage of progress (ZYN). This a part of the enterprise is rising volumes at 66% YoY within the US within the third quarter and is already at a $3.2 billion income run charge (~800 million Q3 X 4).

In a comparative valuation, Juul had a valuation of $38 billion in 2018 on $1.3 billion in income, equating to a worth to gross sales ratio of 29.23x gross sales. If we apply a extra conservative 20x gross sales a number of to annualized Zyn/the Swedish Match division gross sales we will attain a division valuation of $64 billion. Remember as properly that Zyn has not confronted the scrutiny (but) that Juul finally confronted for advertising and marketing their product to youngsters. The well being results are additionally much less pronounced that means the chance of swift public frustration is decrease. Each of those elements imply the division (particularly given the expansion charge) might be price the next worth to gross sales a number of. I’ll maintain it at a extra conservative 20x annual gross sales a number of.

By itself, if we add this marginal valuation of Zyn to Philip Morris’ market cap ($141 billion) this might equal a brand new market cap of $64 billion. This represents a ~45% upside from the present market costs.

Why I Do Not Assume This Is Priced In

Regardless of Zyn’s potential and market efficiency, PMI’s inventory has proven volatility, probably indicating an underestimation of Zyn’s worth available in the market.

The corporate trades at 14.94 occasions ahead earnings (non-GAAP). This compares to a sector median of 17.21 occasions earnings. Zyn is among the hottest, quickest rising merchandise within the tobacco/nicotine business. For the proprietor of the corporate to be buying and selling at a decrease ahead PE than the business doesn’t make sense to me. This makes me imagine the road shouldn’t be pricing within the results of Zyn.

Dangers

Whereas I believe Zyn is probably going so as to add severe upward strain to Philip Morris inventory, the street could also be rocky. This final quarter, gross sales of smokeless merchandise as an entire didn’t reside as much as expectations. I believe it is a non permanent blip and ignores the diamond within the tough: Zyn (by itself) has the facility to be a sport changer for Philip Morris. It continues to beat administration expectations (Q3 Earnings Name).

Moral Word

The transition in the direction of merchandise like Zyn, although probably decreasing sure well being dangers, poses moral questions. Zyn has been proven to ship a way more potent dose of nicotine into the bloodstream. This may trigger youthful adults (whose brains should not totally developed but) to turn out to be highly dependent on Zyn. Whereas that is helpful for gross sales, that is regarding for a long term fame.

Huge Takeaway

PMI’s strategic transfer to include Zyn into its portfolio is a big step in the direction of a smoke-free future. It diversifies PMI’s choices and positions the corporate properly in a altering market, and the moral implications of Zyn seem like decrease than different smoking options which were widespread (Juul). The growing shopper adoption and velocity of Zyn, reinforce PMI’s place as a pacesetter within the smoke-free market, aligning with its purpose of turning into considerably smoke-free by 2030​​. I believe the inventory is a purchase, however moral issues should be weighed earlier than a purchase order.