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Can RRPs Lift the Performance of Tobacco Industry Players?
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The Zacks Tobacco industry includes companies that manufacture cigarettes and other tobacco and nicotine-based products such as cigars, snuffs, oral tobacco and e-cigarettes, to name a few. Some of the firms are also engaged in making vaping and tobacco heating devices. Players in this space sell products mostly through large retail firms, distributors, wholesalers, and grocery chains.
Let’s take a look at the industry’s three major themes:
Deteriorating cigarette sales are a drag on revenues for tobacco industry participants. Cigarette sales volumes are being dampened by strict protocols issued by the Food and Drug Administration. Serious health hazards caused by nicotine use have resulted in regulatory whips on tobacco players. Some of the guidelines issued by the FDA include the mandatory use of precautionary labels on cigarette packets and self-critical advertisements. Such stringent regulatory barriers are likely to stub cigarette sales going ahead.
In a bid to counter declining volumes as well as high taxes, tobacco firms are resorting to higher cigarette pricing. As smokers tend to absorb price hikes owing to their addiction, this strategy is likely to support players in the tobacco space in the near term.
E-cigarettes and other vaping products are picking up pace owing to their low-risk claims. Consumers’ growing enthusiasm for such reduced risk products (RRPs) is leading companies to make significant investments in this area. In fact, RRPs are viewed as products that are likely to shape up the future of many tobacco firms. However, the FDA is keeping a close tab on the manufacturing and marketing policies of such items in order to regulate its usage among the youth.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #176, which places it in the bottom 31% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined nearly 9.1%.
Despite the dull scenario of the industry, we 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 Lags S&P 500 and Sector
The Zacks Tobacco industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 1.7% over this period against the S&P 500’s rally of 12.4% and the broader sector’s increase of roughly 6.1%.
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 12.70X compared with the S&P 500’s 17.18X and the sector’s 18.81X.
Over the past five years, the industry has traded as high as 21.23X and at the median of 17.47X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years) Bottom Line
There is no denying that tobacco companies are reeling under receding cigarette sales volumes. In such a scenario, price hikes and the gradual expansion in RRPs are expected to offer some respite.
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.
Altria Group, Inc. (MO - Free Report) : This renowned tobacco company has gained 4.4% in a year. It has an estimated long-term earnings growth rate of 7.8%. It came up with average positive earnings surprise of 1.3% for the last four quarters. The Zacks Consensus Estimate for the current fiscal year has inched up by a penny in the past seven days.
Price and Consensus: MO
Philip Morris International Inc. (PM - Free Report) : This New York-based tobacco company has gained almost 8.2% in the past year. The company has an estimated long-term earnings growth rate of 7.4%. It has outperformed the Zacks Consensus Estimate by average of 11.3% in the trailing four quarters.
Price and Consensus: PM
Imperial Tobacco Group PLC (IMBBY - Free Report) : This tobacco player has a long-term earnings growth rate of 7.2%. Moreover, the stock has gained 4.2% in a year.
Price and Consensus: IMBBY
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A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
Image: Bigstock
Can RRPs Lift the Performance of Tobacco Industry Players?
The Zacks Tobacco industry includes companies that manufacture cigarettes and other tobacco and nicotine-based products such as cigars, snuffs, oral tobacco and e-cigarettes, to name a few. Some of the firms are also engaged in making vaping and tobacco heating devices. Players in this space sell products mostly through large retail firms, distributors, wholesalers, and grocery chains.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #176, which places it in the bottom 31% 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined nearly 9.1%.
Despite the dull scenario of the industry, we 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 Lags S&P 500 and Sector
The Zacks Tobacco industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 1.7% over this period against the S&P 500’s rally of 12.4% and the broader sector’s increase of roughly 6.1%.
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 12.70X compared with the S&P 500’s 17.18X and the sector’s 18.81X.
Over the past five years, the industry has traded as high as 21.23X and at the median of 17.47X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Bottom Line
There is no denying that tobacco companies are reeling under receding cigarette sales volumes. In such a scenario, price hikes and the gradual expansion in RRPs are expected to offer some respite.
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.
Altria Group, Inc. (MO - Free Report) : This renowned tobacco company has gained 4.4% in a year. It has an estimated long-term earnings growth rate of 7.8%. It came up with average positive earnings surprise of 1.3% for the last four quarters. The Zacks Consensus Estimate for the current fiscal year has inched up by a penny in the past seven days.
Price and Consensus: MO
Philip Morris International Inc. (PM - Free Report) : This New York-based tobacco company has gained almost 8.2% in the past year. The company has an estimated long-term earnings growth rate of 7.4%. It has outperformed the Zacks Consensus Estimate by average of 11.3% in the trailing four quarters.
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Price and Consensus: PM
Imperial Tobacco Group PLC (IMBBY - Free Report) : This tobacco player has a long-term earnings growth rate of 7.2%. Moreover, the stock has gained 4.2% in a year.
Price and Consensus: IMBBY
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
See 7 breakthrough stocks now>>