So, back to this analyst call that Altria and Philip Morris could recombine. It almost seems too good to be true. Wells Fargo’s Bonnie Herzog has a report showing that Philip Morris is changing the world one smoker at a time. The firm noted that the iQOS smokeless cigarette is redefining the smoking experience and is poised to drive transformative growth. Herzog’s view is that the Philip Morris new “Heat-Not-Burn” technology is set to revolutionize the global tobacco industry.
Herzog said that the iQOS could displace up to 30% of the combustible cigarette industry in the developed markets by the year 2025. It could also increase smoking prevalence and accelerate the premiumization of the overall market. Here is what was said about a potential recombination, with iQOS being the catalyst:
We strongly believe iQOS is a win-win for both Philip Morris and Altria and increasingly believe it could be the catalyst to reunite the companies, as speculated in a recent Bloomberg article without comment from management. Potential benefits could include: significant synergies/cost savings; geographic diversification; better aligned incentives and opportunities especially as it relates to new technologies such as iQOS; and the ability to more effectively compete on a global basis. However, regardless of a potential merger between the two companies, we believe Philip Morris’ strategic framework with Altria to commercialize reduced-risk tobacco products and e-cigs is a clear positive for both.
Before getting too excited about a merger here, it is important to understand that Wells Fargo is seeing big upside with or without any potential merger noise.
All in all, Wells Fargo’s report says that the market is underestimating the potential upside for both Altria and Philip Morris. Its 10-year discounted cash flow model suggests that iQOS could add an incremental value of $27 per share for Philip Morris and could add $10 per share for Altria. The firm decided to increase its valuation range by $15, up to $109 to $111, for Philip Morris and by another $5 to a range of $69 to $71 for Altria.
The Philip Morris stock price was last seen at $95.09, with a consensus analyst price of $91.69 and a 52-week range of $75.27 to $95.31. Altria shares were trading at $62.69, with a consensus analyst price of $64.88 and a 52-week range of $47.31 to $63.08.
A recombination of these two companies would be more than interesting — and more than problematic. Altria is now in a position where it can mostly quantify its smoking and tobacco suit liabilities. That might not be true for Philip Morris, due to how many countries it operates in.
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