The tobacco sector hasn’t been considered a place to find growth stocks for a very long time. However, Philip Morris International (PM -2.21%) could change that narrative as its smoke-free business continues to generate tremendous momentum for the company. The stock recently hit an all-time high following another strong quarter and is up more than 40% year to date.

Let’s take a look at the tobacco company’s third-quarter results to see if the stock’s rise can continue.

Zyn boosts results

Zyn continues to be the main driver of growth for Philip Morris, with volumes up 43.6% year-over-year to 164.6 million cans in the quarter.

If you’re not familiar with Zyn, it’s a nicotine pouch made with nicotine powder and flavorings instead of tobacco. Philip Morris acquired the brand in late 2022 by purchasing Swedish Match in what proved to be a groundbreaking acquisition.

Meanwhile, Philip Morris also continues to see strong sales of heated tobacco units (HTUs), including its IQOS system. HTU volumes increased 8.9% to 35.3 billion units during the quarter. Excluding the net impact of estimated distributor and wholesaler inventory movements, volumes increased by 14.8%. These gains were driven by Japan and Europe.

Traditional cigarette volumes also increased, increasing 1.3% to 163.2 billion units. Its market share is down slightly to 24.2%

Overall, organic revenue, which excludes currency effects, acquisitions and divestitures, increased 11.6% year over year to $9.9 billion. Adjusted earnings per share (EPS) increased 18.0% (in constant currency).

On an organic basis, combustible tobacco revenue increased 8.6%, driven by high single-digit pricing and resilient volumes. The smoke-free business saw its organic revenue increase by 16.8%.

In addition to being powerful growth engines, Zyn and IQOS also have higher performance. gross margins, which helped the company see an 80 basis point increase in organic gross margins. Gross margins for smokeless products climbed 200 basis points, while gross margins for organic fuels increased 10 basis points. Management noted that gross margins for smokeless products were more than 450 basis points higher than gross margins for fuels during the quarter.

Image source: Getty Images.

This strong dynamic has led management to once again raise its outlook for the full year 2024.

Data source: Philip Morris International.

It expects to generate approximately $11 billion in operating cash flow while spending $1.4 billion on capital expenditure. Much of the latter will increase Zyn’s capacity in the United States.

The company also increased its quarterly dividend by 3.8%, to $1.35. This results in a forward dividend yield by 4.1% as of this writing, and it is well covered by the company’s cash flow.

Is it too late to buy Philip Morris stock?

While tobacco companies have long talked about sowing the seeds of a shift in their business away from traditional cigarettes, Philip Morris is already well into its harvest, as its smokeless products generate significant revenue and profit growth for the company. ‘business. Meanwhile, cigarette volumes remained stable, despite rising prices, contributing to the string of higher profits and higher forecasts this year.

Philip Morris continues to expand its Zyn production capacity in the United States and has the opportunity to expand its presence in other countries. IQOS has only just arrived in the United States with an initial launch in Austin, but the company is looking to get its latest version of the product approved by the FDA next year, which could provide another tailwind into 2026.

The stock is trading at a forward price/earnings (P/E) ratio of 18 based on analyst consensus for 2025. Even its PEG (price/earnings/growth ratio) a ratio of 0.7 places it in what is commonly considered undervalued territory.

Data by Y Charts.

Despite recent gains, it’s not too late to buy stocks. Philip Morris is a rare example of a large-cap growth stock in a defensive sector. Although its valuation has increased given the stock’s strong performance this year, it remains very attractive, especially when taking into account the generous dividend.