<div id="readability-page-1"><div><div>Let's take a close look at Philip Morris. If you just glanced at the headlines following the company's third-quarter 2025 earnings, you saw a stock that plunged, at one point dropping over 8%. The market reacted with significant negativity to what was, on the surface, a solid report. I have learned over my career to pay very close attention when a company delivers a double beat on revenue and earnings, raises its full-year guidance, and the stock still gets heavily sold off. This kind of disconnect is rare, and it's often where the real money is made.In my opinion, the market has misread the situation. The reaction appears to be based on a short-term interpretation of the data, while the underlying long-term story has only improved. <figure></figure> PM Data by GuruFocusThe market is still trying to value Philip Morris as a dying cigarette company, and it is fundamentally failing to understand the high-growth, high-margin consumer products company it has already become. The recent pullback has created an entry point. I am upgrading my rating and recommending Philip Morris as a core long-term buy. Let me walk you through my reasoning.The Smoke-free Business is Taking OverFirst, let's banish the idea that PM is just a cigarette company. That narrative is years out of date. We are witnessing, in real-time, a tale of two companies under one roof, and the new, better company is rapidly taking over. The most important number you need to know is 42%. In the first nine months of 2025, Philip Morris's smoke-free business; that's IQOS, ZYN, and VEEV; generated 42% of the company's total revenues. This isn't some futuristic projection; it's what's happening right now. This is a massive leap from the 38% it accounted for in the same period just last year. This new, high-growth segment is expanding at an explosive 16.1% year-over-year clip.<figure></figure>[Source: Philip Morris International]Now, here's the second-most important part: the legacy business isn't dying. The legacy combustibles division, the one everyone has been writing obituaries for, saw its revenue grow by 2.2% over the same period. How is this possible when combustible volumes are in secular decline, dropping by about 1.5% to 3.2%? The answer is strong pricing. This creates an effective, self-funding loop that the market appears to be overlooking. PM is using its incredible pricing power in the legacy business as a cash cow to generate stable, predictable profits. It is then taking that cash and reinvesting it to fuel the 16.1% growth of its new, dominant smoke-free franchise. This is a low-risk, internal-funding model that doesn't rely on fickle debt or equity markets to finance its own transformation.Margin-Accretive CannibalizationThis brings me to the second part of the bull thesis. In almost every industry transformation I've ever covered, the scary part is margin dilution. The new products almost always have lower profit margins than the old ones. The company gets bigger, but less profitable. Philip Morris has achieved the exact opposite. This isn't cannibalization; it's a premium upgrade. In the third quarter of 2025, the gross profit margin for the new smoke-free business was a stunning 70.5%. For comparison, the company's overall gross margin was 67.85%.<figure></figure> PM Data by GuruFocusThis is a critical data point: the new products are more profitable than the old ones. Every time a customer switches from a Marlboro cigarette to an IQOS heated tobacco stick, Philip Morris's margin mix improves. The company is systematically replacing a historically high-margin product with an even higher-margin product. The numbers from another angle confirm this perfectly. The smoke-free portfolio accounts for just 22% of the company's total shipment volume, but it delivers an enormous 40% of its total net revenue. The revenue and profit per unit are simply in another league. This accretive margin model fundamentally de-risks the long-term earnings story and provides a powerful, built-in tailwind for future EPS growth.What the Inventory Data RevealsThe top-line and margin stories are spectacular. But as an analyst, I like to find on-the-ground proof. I want to see it in the operations. And we can find it in, of all places, the inventory line on the balance sheet. For a consumer business, rising inventory is often a massive warning sign. It suggests the company is overproducing while demand is softening. If you looked at PM's balance sheet in isolation, you might be alarmed. Inventory has been climbing at a good pace. It was $9.38 billion in the June quarter of 2024. Today, it stands at $10.72 billion. That's a $1.4 billion increase. However, this analysis is only negative if the company can't sell it in time. To check that, we look at a metric called Days Inventory Outstanding (DOI), which measures how long a company holds its inventory before selling it. PM's DOI for the June 2025 quarter was 269.93 days. This is not only a decrease from the prior quarter, but it's also moderately below the 5-year average of 279.33 days. This is a positive combination. In plain English: The company is stocking more, but it's selling that stock faster. This is not a sign of weakness, but rather an indicator of a company aggressively ramping up production to meet demand that is even more aggressive. The company is chasing demand. This inventory data is a powerful, non-obvious signal of management's confidence and serves as an independent, on-the-ground verification of the accelerating demand for its smoke-free products.Deconstructing the Q3 2025 Sell-OffThis brings us back to the Q3 stock drop. Now that we understand the long-term fundamentals, let's deconstruct the &#34;bad news&#34; that spooked the market. First, let's be clear: the quarter was not bad. Philip Morris delivered a double beat, with adjusted EPS coming in $0.14 ahead of expectations and revenue beating consensus by $190 million. Even better, management raised its full-year 2025 adjusted EPS guidance to a new range of $7.46 - $7.56. So why the 8-10% plunge? The stock sold off because the market was surprised by the increase in U.S. Zyn investments, which caused operating income to miss the consensus estimate. This is a classic example of short-term focus, and it's the exact reason we have an opportunity. The market saw an expense, but I see an investment. For the past year, one of the biggest constraints on Zyn's growth has been supply. The company literally couldn't make the cans fast enough. Now, those supply constraints have ended. What is the absolute, 100% correct strategic move when the bottleneck on your #1 growth product is finally removed? You hit the gas. You spend whatever it takes on marketing; like free Zyn cans; to gain brand awareness and lock in its lion's share of the market (currently estimated at 60% in volume and two-thirds by value). This is especially true in a highly competitive market where rivals are using promotions. You don't sit back and let them chip away at your lead; you press your advantage. Penalizing the stock for reinvesting its top-line outperformance back into its most important growth driver is misguided. The market is punishing a Q3 2025 expense, but I am looking to buy the 2026, 2027, and 2028 revenue streams that this investment will secure.A Look at Guru ActivityIt's always useful to see what other large-scale managers are doing. Institutional filings are backward-looking; most of the data we have is from Q2 2025, before this recent drop; but they paint a fascinating picture. PM is a true &#34;battleground&#34; stock, not a crowded, consensus trade, and that's often where the best opportunities are found. On one side, you see some managers taking profits. Stanley Druckenmiller (Trades, Portfolio), for instance, sold about 26% of his position in Q2. Given that he first bought in Q2 2024 and enjoyed a massive run, this looks like a prudent, analytical decision to trim a winner, not a bearish rejection of the thesis. Likewise, other long-term holders like Terry Smith and Tom Russo (Trades, Portfolio) also made modest reductions. This is normal portfolio management. On the other side, you see aggressive, high-conviction buying. Ray Dalio (Trades, Portfolio)'s Bridgewater Associates nearly doubled its position in Q2, increasing its stake by 99%. Most telling of all, PRIMECAP Management (Trades, Portfolio), a well-respected growth-oriented firm, established a massive new position, increasing its holdings by nearly 600%. This divergence is perfect for us. It shows that while some are taking profits, the newest and most aggressive moves are coming from managers who are clearly buying into the long-term smoke-free transformation story.Addressing the Valuation PremiumThis all sounds great, but a great company isn't always a great stock. We have to talk about valuation. The bear case is simple: PM stock's current P/E ratio is not cheap. The stock's TTM non-GAAP P/E ratio is sitting around 28x. That is a sizable premium. It's more than 40% above its own 5-year average of 20x. If you look at its free cash flow (FCF) yield, the story looks even worse. PM's FCF yield is a paltry 3.8%. That looks drastically lower than peers like Altria (MO) at 7.9% or British American Tobacco (BATS) at a massive 10.8%.<figure></figure> PM Data by GuruFocusSo, yes, the stock is expensive on these simple metrics. If you're a deep-value investor, this isn't for you. However, my analysis indicates that PM may deserve this premium valuation. Comparing PM's valuation to its peers is an apples-to-oranges fallacy. This compares a growth-oriented company to peers in a different, more mature phase. PM has a 7.09% 3-year revenue CAGR; its peers are stagnant. You can't pay the same multiple for a business growing at 7% (and 16% in its core new segment) as you do for one that isn't. The market is paying a premium for a reason: PM has intangible value in its brands, a dominant market position in the next generation of products, and, as we've established, a better underlying profit per unit on those products. That low 3.8% FCF yield? It's low for the right reasons. BATS has a 10.8% yield because it's in decline mode and has nothing better to do with its cash than give it all back. PM has a low yield because it's in growth mode, reinvesting billions into high-return projects like the Zyn investments that the market just punished it for.So, how do we square this? The stock is expensive on simple metrics but has superior growth. This is a classic &#34;growth at a reasonable price&#34; (GARP) dilemma, and there's a better metric for this exact situation: the PEGY ratio. It's defined as the P/E ratio divided by the sum of the earnings growth rate and the dividend yield. For a dividend-paying growth stock, it's the right tool. Let's run the numbers. PM has a forward P/E of about 18.4x, an expected EPS growth rate of 14.47%, and a dividend yield of 3.48%.<ul><li>PEGY = 18.4 / (14.47 + 3.48) = 1.025x</li></ul>A PEGY ratio of 1.0x is considered the ideal threshold. At 1.025x, PM is trading at a slight premium, but it's a world away from a narrative of dangerous overvaluation that a 28x P/E ratio might suggest. It confirms my view: the price is fair, bordering on attractive, for the quality and growth you're getting. The stock is overvalued in the short term if your time horizon is the next three months. But if you are a patient investor, the outlook is exceptional. Analyst estimates for 2030 imply a forward P/E of just 12.4x. That shows you the deep value that will be unlocked as the company's earnings grow into its multiple.Final ThoughtsMy analysis leads me to side firmly with the Long-Term Buy case. The market has punished the stock for a short-term 'expense'; the Zyn investment; while ignoring that this is the correct strategic move to secure long-term market dominance. This myopic view overlooks the fundamental transformation underway: PM is trading a high-margin legacy business for an even higher-margin smoke-free future, as the 70.5% gross margin on new products proves. The recent 8-10% stock drop is therefore not a sign of a broken company, but a pricing error from the market.Management's own actions confirm this long-term confidence. They just announced a massive 8.9% dividend increase. You don't authorize a hike that large unless you are absolutely certain that the cash flows are real, sustainable, and growing. This move is even more prudent when you see they are suspending share buybacks, choosing to prioritize the dividend and deleveraging the balance sheet after the Swedish Match acquisition. Now, I must be balanced. This is not a risk-free investment. The primary bear case is, and always will be, regulation. We are seeing countries like Belgium, France, and the Netherlands move to ban nicotine pouches. This is a direct, material threat to the Zyn growth story, and we must monitor it. But the global market is vast, and PM has a dominant market position to navigate these challenges. The long-term case is stronger than ever. The recent &#34;bad news&#34; was a strategic investment, and I'm recommending this as a long-term entry point.</div></div></div>

The article presents a positive outlook on Philip Morris despite a recent stock sell-off. The author argues that the market has misinterpreted the company's strong earnings report, which showed a double beat on revenue and earnings and raised full-year guidance. The shift towards smoke-free products, which now account for 42% of revenue, is highlighted as a key growth driver. The legacy business remains profitable, supporting the transformation. The smoke-free segment's higher profit margins and inventory data further support the bullish view, recommending Philip Morris as a long-term buy.

Why I'm Positive on Philip Morris Despite the Sell-off