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Tobacco Industry Outlook: RRPs Could Drive Recovery

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The Zacks Tobacco industry comprises companies that are mainly engaged in the manufacturing of cigarettes along with other tobacco and nicotine-based products such as cigars, snuffs, oral tobacco and e-cigarettes, to name a few. Some of these categories, especially e-cigarettes, which does not involve burning tobacco, are also popular as smokeless or reduced risk products (RRPs).

Additionally, some companies are engaged in the manufacturing of vaping and tobacco heating devices. Tobacco firms sell their products mostly through wholesalers, distributors, large retail organizations, and grocery chains.

Let’s take a look at the industry’s three major themes:

  • Cigarette sales volume has been declining globally and denting revenues for the industry participants, thanks to the imposition of strict regulations by the Food and Drug Administration. The agency has been brandishing the whip on tobacco players owing to health hazards. Some of the regulatory actions imposed by the FDA include the mandatory use of precautionary labels on cigarette packets and broadcasting of self-critical advertisements. Also, the FDA is now focusing on lowering the use of nicotine in cigarettes to minimally addictive levels, which might further reduce sales for the industry participants.
     
  • Apart from declining volumes, rising taxes on cigarettes have also been a worry. In a bid to counter such limitations and stay afloat, these companies have been resorting to higher cigarette pricing. As smokers tend to absorb price increases owing to their addiction, this strategy could be of some help in the near term.
     
  • Of late, tobacco companies have been inclining toward developing low risk and scientific alternatives for cigarettes. In this respect, e-cigarettes are becoming increasingly popular and aiding revenue growth for major tobacco players. In fact, e-cigarettes and similar RRPs are viewed as the future products for these companies.  However, the FDA has been keeping close vigilance on the manufacturing and marketing policies of RRPs, in order to regulate its usage among youths.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #110 which places it in the top 43% 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 bright 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.

That said, we will present a few stocks that carry significant growth prospects. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags on Stock Market Performance

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 declined 27.2% over this period, compared with the S&P 500’s rise of 4.7%. Meanwhile, the broader sector has fallen roughly 10%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 12.54X compared with the S&P 500’s 17.59X and the sector’s 20.28X.

Over the past five years, the industry has traded as high as 23.92X, and at the median of 17.82X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

 

Bottom Line

Persistent decline in cigarette sales is undeniably a limiting factor for tobacco companies. The industry participants are therefore striving to develop RRPs and other safe alternatives, which not only abide by FDA protocols but also help generate substantial consumer interest. Though such alternatives are gaining traction, they are yet to emerge as a strong category to battle declining cigarette volumes.

While none of the stocks in the Zacks Tobacco universe currently holds a Zacks Rank #1 (Strong Buy) or 2 (Buy), here we present three stocks with a Zacks Rank #3 (Hold), which are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Philip Morris International Inc. (PM - Free Report) : This New York-based tobacco company has gained almost 14.3% in the past six months. The company has an estimated long-term earnings growth rate of 8.7%. It has outperformed the Zacks Consensus Estimate by an average of 9.3% in the trailing four quarters.

Price and Consensus: PM

 

Altria Group, Inc. (MO - Free Report) : The company has an estimated long-term earnings growth rate of 8.6% and has an average positive earnings surprise of 4.5% for the last four quarters, including a beat in every quarter. Markedly, Altria’s consensus EPS estimate for the current fiscal year has been stable over the last 30 days.

Price and Consensus: MO

 

Imperial Tobacco Group PLC (IMBBY - Free Report) : This tobacco player has a long-term earnings growth rate of 5.9%. Moreover, the company’s consensus EPS estimate for the current fiscal year has improved over the last 30 days.

Price and Consensus: IMBBY

 


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