Philip Morris International (PM)

Total return at 5 years: 5.6%/year = 2.0% appreciation + 3.6% dividend. The target price ($213) is ex-dividend; the $36 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $220 · Multiples $203) exceeds the market price ($193).

Today — fairly valued: at $193 trades ~4.8% below its value discounted to today (~$203); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($213) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$130.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($193) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (3.0%/year) than we project (6.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$13.7 bn of owner earnings in year 5 (vs ~$15.8 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Utilidad neta comparable (P/E). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Nicotine consumer staple: valued on P/E over comparable net income, which gives equity value directly (earnings are already post-interest —the Swedish Match debt already weighs— and post-tax), with no EV→equity bridge. Rolling grid: the base year is the real TTM (revenue of US$42.5 billion as of Jun 30, 2026) with normalized earnings (~$11.5bn: GAAP FY2025 of $11.3bn was already clean; FY2024 was depressed by the $2.3bn RBH Canada impairment, a tobacco litigation matter). The engine is the mix shift toward smoke-free products (IQOS + ZYN, already 42% of revenue, margin-accretive, growing double digits) + cigarette pricing power, against combustible volume decline (−1.5%) and the tax rate rising toward 21.5% (from 19.7% with a one-off benefit). Earnings grow ~7%/year toward ~$16bn. Exit multiple 20× (base; bear 16× / bull 23×): the top of the band for a quality consumer staple, with modest compression from today's multiple — the re-rating from tobacco company to growth consumer staple has already happened. No buybacks (paused to deleverage); it does not accumulate cash (an aristocrat dividend at ~85% of FCF + deleveraging). The dividend (3%, 17 years of increases) is the bulk of the return.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $213 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $193, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $213 in 5 years plus $36 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $203. Against the current market price ($193), the margin of safety is 4.8% (trades below the maximum → there is margin) and the total return at that price would be 5.6% annually.

• Multiple vs the sector. 26× (TTM), above the band for a quality consumer staple (16-22x). The re-rating from tobacco company to growth consumer staple has already happened; expensive in absolute terms.
• The consumer-staple band. Exit P/E of 20x = the top of the quality-consumer-staple band (16-22x), justified by smoke-free growth but with compression from 26× today.
• Margin of safety. 5-year base ~$208 vs price ~$193 → total return +6%/year, of which the dividend (3.1%) is the largest part. Full price, with little margin. Asymmetry not favorable.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (102%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC vs the 10% bar. ROIC ~22% — well above the bar, the mark of a nicotine business with pricing power. An exceptional-quality franchise.
• Quality of cash generation. Strong and predictable cash flow ($12.7bn FCF); earnings are high quality (nicotine does not require heavy reinvestment, capex ~4% of revenue).
• Balance sheet. ⚠️ High net debt (~2.7x EBITDA, from Swedish Match), negative book equity, buybacks paused. Manageable (strong FCF) but leveraged — the weak point.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Philip Morris's engine is nicotine volume × price, and the growth driver is the mix shift toward smoke-free. IQOS (155bn consumables, +11%) and ZYN (880M cans, +37%) grow at a double-digit rate and with better margins than cigarettes — every point of share they gain improves the profitability of the whole. Cigarettes decline in volume (−1.5%) but pricing power sustains their revenue. The dividend (aristocrat, 17 years) is a central component of the return; buybacks are paused until the Swedish Match debt deleverages.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Smoke-free growth (IQOS +11%, ZYN +37%) is real and volume-driven; cigarette growth is price (volume declines). The smoke-free mix is the genuine engine.
• Growth engine. Margin-accretive smoke-free (42% and rising) + IQOS in the US (unopened) + ZYN. A long runway of smoker conversion. The best growth profile in the sector.
• Combustible decline / regulation. Cigarettes decline faster (−5.1% in Q1); regulation (EU/FDA) is the risk to projected smoke-free growth.

• Relevant in 10 years (recurrence). Nicotine has addictive, recurring demand; the mix migrates from cigarettes (declining) to smoke-free (growing), but the category is relevant. High recurrence.
• Pricing power. Extraordinary: nicotine addiction allows raising prices year after year without losing the customer — pricing power sustains cigarette revenue despite the volume decline.
• Moat and its direction. Wide moat (brand + addiction + regulation + scale), widening with leadership in smoke-free (IQOS + ZYN). Among the best in consumer staples.
• Controversy / social risk. The product is nicotine — moral controversy, permanent regulatory risk (EU, FDA), and litigation (ZYN). A structural backdrop that does not go away.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)7.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 102% of ROIC
• ✓Value creation (ROIC − 10% bar)+12pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.0x — no over-investment
• !Float / working capitalConsumes cash $0.3 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.7% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~$46.5bn (~2.7x EBITDA) from Swedish Match; negative book equity; buybacks paused. The weak point of the balance sheet.
• Coverage / cash. FCF ($12.7bn) covers the dividend (~71% payout) + deleveraging. No liquidity crisis, but little room for more.
• FX / geopolitical exposure. 100% international (EUR, ruble, peso, hyperinflationary currencies); Russia ~6% of revenue with expropriation risk. Volatility in dollar earnings.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Olczak ~500K shares (~$96M); compensation tied to adjusted earnings + sustainability. No founder control. Anti-hedging/pledging. Reasonable alignment.
• Capital allocation. Dividend aristocrat + deleveraging Swedish Match. The Swedish Match acquisition (ZYN) was strategic but leveraged the balance sheet heavily; buybacks paused.
• Efficiency / integrity. Solid execution of the smoke-free transition (already 42% of revenue, margin-accretive); clear disclosure. The combustible restructuring (plant closures) is discipline.

• It is not cheap: it trades at 26× (TTM), above the band for a quality consumer staple (16-22x).
• The re-rating from 'value tobacco' to 'growth consumer staple' has already happened — the market already pays for the smoke-free story (IQOS + ZYN, margin-accretive, double-digit) and for ZYN's MRTP (the Jun-2026 catalyst is already in the price).
• ZYN's Q1 2026 decline (channel destocking) created noise, but the company documents it as transitory (category share >60% sustained) — it is not an opportunity discount at today's price.

The opposite case of a bargain: a quality nicotine franchise, transformed into a growth business, already valued as such. The perception-reality gap that existed (the market saw a declining tobacco company; the reality was a growing smoke-free business) has already closed — the re-rating happened. Without a new discount catalyst, the return depends on growth outrunning multiple compression, and at this price it barely does; the dividend (3.1%) carries the return.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -2%/year (-10% total): the margin of safety protects the downside. The bull (+12%/year, +78% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Regulation. The central disconfirming factor: the EU tobacco framework review (2026) + the risk of FDA revocation over ZYN/IQOS could stall the smoke-free thesis.
• Full valuation. At 26×; the re-rating has already happened — little room if growth disappoints.
• Cigarette decline. Combustible volume falls faster (−5.1% in Q1); pricing power offsets it for now, but it is a business in volume contraction.
• Debt + FX + Russia. High debt that paused buybacks; total FX exposure; Russia with expropriation risk. Structural volatility factors.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 22% above the 10% bar, but the margin is limited (+5%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a PEG of 4.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 4% (EBIT/EV) + ROIC 22% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 3% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -6%/yr, bull-scenario ceiling +9%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, widening; sources: intangibles, switching costs, cost advantage, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 3%, within what we project (6%) — the story squares with the numbers.