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3 Tobacco Stocks to Watch for Gains in a Challenging Industry

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Receding cigarette sales volumes have continued to remain a major downside for the Zacks Tobacco industry participants. Tight regulatory norms levied on the sales and marketing of cigarettes as well as consumers rising health consciousness have eclipsed cigarette sales.

Nevertheless, rising demand for low-risk tobacco alternatives has been aiding growth for some of the players in the tobacco industry. These products are gaining popularity due to their less harmful impacts on health. Also, strong pricing has been offering respite to a number of tobacco companies including Philip Morris International Inc. (PM - Free Report) , Altria Group, Inc. (MO - Free Report) , and Vector Group Ltd. (VGR - Free Report) .

About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as other tobacco and nicotine-based products such as cigars, snuffs and oral tobacco. Some of the companies also offer reduced risk products such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are also engaged in making devices and attachments that are needed in vaping and heat-not-burn products. Most of the products manufactured by the tobacco industry participants fall under the strict vigilance of the U.S. Food and Drug Administration (FDA), and are required to follow the permissible levels of nicotine in manufacturing. Players in this space sell products mostly through large retailers, distributors, convenience stores, drugstores, wholesalers and grocery chains. Additionally, some of the international tobacco firms operate in the country through subsidiaries.

4 Trends Shaping the Future of Tobacco Industry

Weak Tobacco Sales Volumes: Dwindling cigarette sales volumes have been adversely impacting a number of tobacco companies. Cigarette volumes are being affected by strict government regulations pertaining to sales, marketing and manufacturing of such items. Such regulatory norms are imposed due to the health hazards caused by the consumption of nicotine. Some of the guidelines issued by the FDA include mandatory use of precautionary labels on cigarette packets and self-critical advertisements. Moreover, campaigns against tobacco consumption have led to increased consumer awareness, which has in turn resulted in lower smoking rates. Since cigarette sales account for the majority of revenues for the companies in the tobacco industry, the abovementioned trends pose concerns.

Pandemic-Led Adversities: Soft duty-free business stemming from reduced traveling amid the pandemic has been weighing on cigarette sales volumes of some tobacco companies. Such challenges are likely to continue unless the limitations on international traveling are waived off. Apart from this, the risk of serious lung diseases related to the virus keeps consumers somewhat cautious about smoking.

High Pricing is an Advantage: Companies in the space are likely to keep gaining from the pricing power of tobacco products, which also helps them make up for high taxes. As smokers don’t mind a price hike due to their addiction, this strategy is likely to keep working for players in the tobacco space. Evidently, high pricing for cigarettes has been supporting revenues and operating income for some of the players in the tobacco industry.

Low Risk Products are Growing: Low-risk tobacco alternatives, also referred to as next-generation tobacco products, have been gaining immense popularity. As compared to cigarettes, these products are claimed to be less detrimental to health owing to their scientific composition and the manner of use. In fact, consumers are increasingly taking to such products in a bid to quit cigarettes. Markedly, tobacco biggies have been witnessing substantial revenue growth in reduced risk products (RRPs) arena. Companies are making substantial investments to expand in this category, such as undertaking innovations to make these products user friendly and energy efficient. RRPs are expected to continue aiding the performance of tobacco players. That said, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate its usage among the youth.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #227, which places it in the bottom 10% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Despite the murky scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Vs Broader Market

The Zacks Tobacco industry has lagged the Zacks S&P 500 composite and the broader Zacks Consumer Staples sector over the past year.

The industry has gained 18.6% over this period compared with the broader sector’s growth of 20.5%. Meanwhile, the S&P 500 has risen 34% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staples stocks, the industry is currently trading at 11.43X compared with the S&P 500’s 21.84X and the sector’s 20.96X.

Over the past five years, the industry has traded as high as 21.23X, as low as 9.15X and at the median of 12.71X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

3 Tobacco Stocks to Keep a Close Eye on

Vector Group: This Florida-based company is engaged in manufacturing and selling cigarettes in the United States. Some of the renowned cigarette brands of the company are Liggett, Pyramid and Grand Prix. Markedly, during first-quarter 2021, the company gained from growth in operating income in its tobacco business. Moreover, higher pricing acted as an upside for the Liggett brand. This Zacks Rank #2 (Buy) company continues to undertake prudent strategies to expand its tobacco market share and distribution capabilities. Markedly, the Zacks Consensus Estimate for 2021 earnings has remained stable over the past 30 days. Impressively, the stock has rallied 20.4% in the past six months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: VGR


Philip Morris International: It is one of the industry pioneers in driving the shift from cigarettes to RRPs. Markedly, the company’s IQOS is one of the leading RRPs globally. Total users of IQOS as of the end of first-quarter 2021 were estimated to be about 19.1 million. The company is committed toward expanding these products to more markets. Moreover, this Zacks Rank #3 (Hold) company has long been benefiting from its strong pricing for tobacco products, which has aided revenues and adjusted operating income even in the face of an unfavorable tax environment and declining cigarette volumes. Notably, the Zacks Consensus Estimate for 2021 earnings has improved 0.2% over the past 30 days. Shares of this well-known tobacco products company have gained 16.4% over the past six months.

Price and Consensus: PM

Altria Group: The company has a robust portfolio of cigarettes, RRPs and oral tobacco products. It has also undertaken efforts to expand in the cannabis industry. The marketing and technology sharing agreement between Altria and Philip Morris, pertaining to the sale of IQOS in the United States has been yielding results. Apart from this, the company’s HeatSticks has been performing well. Moreover, this tobacco biggie, with a Zacks Rank #3, has been on track with the expansion of its oral tobacco products. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product. Apart from these, consistent gains from higher pricing have been supporting the company revenues. Notably, the Zacks Consensus Estimate for 2021 earnings has improved 0.4% over the past 30 days. The stock has gained 17.4% in the past six months.

Price and Consensus: MO

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