I've Been Wrong About Philip Morris International Stock for 5 Years. Here's Why I'm Finally Changing My Mind.
Key Points
It successfully pivoted from declining cigarettes toward higher-growth, higher-margin smoke-free products.
Strong second quarter results show that this transformation is turning into solid financial performance.
The business looks much stronger, but after major gains, the shares today aren't necessarily cheap.
I've been wrong about Philip Morris International (NYSE: PM) for years. I avoided the stock on the premise that it wasn't a particularly safe ticker given the industry it operates in. But the company has adapted remarkably well, with a growing portfolio of products beyond traditional tobacco, and the numbers are becoming increasingly difficult to ignore.
The stock closed near $192 recently, and has delivered a 137% total return over the past five years, compared with 71% for the S&P 500. Here's what's changed about the company.
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What I got wrong
My thesis was simple and lazy. Cigarette volumes have been declining in developed markets, regulators keep tightening, and a tobacco company can't outrun that math. I treated the company as a yield trap that would grind lower while paying me to wait.
What I missed is that Philip Morris wasn't defending cigarettes. It was funding a replacement with cash from cigarette sales. In 2020, smoke-free products made up 24% of total revenue. By the first half of 2026, that figure hit 42%, and management targets more than two-thirds by 2030. More growth is forecast by 2030, but the direction is settled either way.
Image source: Getty Images.
The quarter that changed my read
Second-quarter net revenue crossed $11 billion for the first time, up 10.4% reported and 7.6% organically, beating the $10.64 billion consensus by 5.2%. Adjusted EPS came in at $2.20, up 15.2%, topping the $2.05 estimate by 7.4% and marking a fifth consecutive quarterly beat. Adjusted operating income reached $4.8 billion, up 12.4%.
The mix is what convinced me. International smoke-free net revenue grew organically by 13.7% in the first half, with gross profit up 16.9%. That segment's gross margin reached 70%, expanding 190 basis points. These are software-like margins on a physical product, and they now sit on nearly half the revenue base.
What the company is up to
IQOS is the engine for the company. Adjusted in-market sales volume grew 5.1% in the quarter, or 10.2% excluding Japan and Poland, where an April excise increase and a flavor ban created transitory drag. IQOS holds roughly 76% of the global heated tobacco category it created, and HTU share stayed stable at 31.8%. Smoke-free products are now available in 108 markets.
ZYN got a regulatory unlock. The FDA granted marketing authorization for 20 ZYN variants during the quarter. United States shipments reached 2.9 billion pouches, up 25% sequentially, with the brand holding 57.1% retail value share. International modern oral shipments grew 32%, excluding the mature Nordic markets. PMI also launched ZYN ULTRA with 9mg and 11mg moist variants.
VEEV is the quiet third leg of the company. E-vapor volume surged 55.1% in the quarter. Total shipments of 205.2 billion units grew 2.5%, and cigarette volumes actually rose 1.1%, which was ahead of expectations.
Why I'm changing my mind now
I think it's time to stop watching from the sidelines with Philip Morris. Management raised 2026 EPS growth guidance to 11% to 13% and reaffirmed 5% to 7% organic revenue growth with 7.5% to 9.5% currency-neutral EPS growth. The company is increasing U.S. investment in ZYN ahead of intensifying competition and preparing the IQOS ILUMA launch.
Three years of 104% returns and five years of 137% didn't happen because of financial engineering. They happened because the company built a higher-margin business within a declining one and reached the point where the new business drives growth. That's a pivot I didn't think was possible, and I was wrong.
At $191.89, the stock is no longer cheap, and some analysts peg total upside near 20.4%, or a 6.6% annualized return, which falls short of what equity risk usually demands. So I'm changing my mind about the business, not claiming the stock is a bargain. Those are different admissions, and only the first one was my mistake.
Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.