Philip Morris International (NYSE:PM) announced better-than-expected third-quarter earnings Oct. 18 that included a 13% beat on the top line and a 5% beat on the bottom. The news lit a fire under PM stock, sending it more than 3% higher on the day.
Still, PM stock is down almost 15% for the year. One way for the shares to rebound would be for the company to steal its former parent’s thunder by making a play for one of Canada’s largest cannabis companies.
Not only does it make good business sense to own all or part of a cannabis company, if it’s able to keep Altria (NYSE:MO) out of the game — or at least delay one of its biggest competitors from immediately entering the market — it’s a double win for shareholders.
Tobacco Companies Were Late to the Party
It’s hard to understand how Constellation Brands (NYSE:STZ) and Molson Coors (NYSE:TAP) were able to get a jump on the tobacco companies with cannabis given the cigarette giants are the ones who understand better than most how to grow, cultivate, and process a leafy product into an end-user application.
The tobacco companies were born to manufacture and sell the various by-products of the cannabis plant which includes marijuana and hemp.
The fact that only now are they considering a move — after legalization in Canada — suggests they’ve been irreparably scarred by years of tobacco litigation.
But, that was then, and this is now.
If Philip Morris CEO Andre Calantzopoulos is smart — and nothing indicates otherwise — he’ll jump into the deep end of the pot pool and make a play for Aphria (OTCMKTS:APHQF), Canada’s fourth-largest cannabis company, or one of the other billion-dollar market caps.
While I don’t pretend to be a cannabis expert and I certainly wasn’t the first, I do take some pride for suggesting back in 2014 that Big Tobacco get in the game.
“These cigarette companies might not publicly express an interest in the cannabis trade, but it would be far more lucrative than eCigs,” I wrote on Jan. 3, 2014. “Besides, a big push into cannabis would give them the cash flow necessary to make a face-saving exit from tobacco.”
Is IQOS Enough?
I know what you’re thinking.
How is big tobacco supposed to generate the cash flow necessary to minimize or eliminate the need for tobacco sales when none of the cannabis companies are making money on a GAAP basis?
There’s no question it’s going to take a decade or more to get to the kind of scale that Philip Morris is accustomed. However, the company is already to trying to wean itself off cigarettes by converting smokers to “reduced risk” products such as IQOS, which heats the tobacco but doesn’t burn it.
In the third quarter, Philip Morris increased IQOS shipment volumes in Italy, Russia, and Korea. The company estimates that 5.9 million adult smokers have switched to its reduced-risk products, which are available in 43 markets around the world. It is currently seeking approval from the FDA to sell IQOS in the U.S.
While an approval would be a big positive for PM stock, it doesn’t hold the same potential on a global basis that cannabis does.
Some experts suggest the global cannabis market could be as big as $150 billion a year by 2025, just seven years away. By comparison, the e-cigarette and vaping market is predicted to hit $47 billion by 2025; one-third the predicted size of the cannabis market.
If I were to hazard a guess which prediction is overly optimistic, it’d be on the vaping market because there aren’t nearly as many product extensions with vaping and e-cigarettes as there are with cannabis.
Bottom Line on PM Stock
I have no idea if Philip Morris has put out any feelers about investing in a cannabis company and Aphria CEO Vic Neufeld denied that any talks were taking place between his company and Altria, so it’s possible Big Tobacco entering the cannabis market might just be nothing but talk.
However, if you’re the speculative type, given Philip Morris International’s positive-enough earnings and its depressed stock price, making a cannabis play here with PM stock isn’t the dumbest idea in the world.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.