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Tobacco Industry Outlook Cushioned by RRP Strength & Pricing

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The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as other tobacco and nicotine-based products such as cigars, snuffs, oral tobacco and e-cigarettes. Some firms are also engaged in making vaping and tobacco heating devices. Players in this space sell products mostly through large retailers, distributors, convenience stores, wholesalers and grocery chains.

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

  • Strict protocols issued by the FDA have been weighing on cigarette sales volumes. Health hazards stemming from the use of nicotine have led to 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. Moreover, campaigns against tobacco consumption have led to increased consumer awareness, which has, in turn, resulted in lower smoking rates. Such trends are likely to continue build pressure on tobacco industry participants’ revenues.
  • To make up for the receding cigarette demand as well as high taxes, companies are increasingly resorting to price hikes. As smokers tend to absorb higher prices due 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 gaining immense popularity, courtesy of their low-risk claims. In fact, consumers are increasingly taking to such products in a bid to quit cigarettes. Driven by the growing enthusiasm, tobacco companies are making substantial investments in the reduced risk products (RRPs) arena. In fact, RRPs are viewed as products that are likely to gain significant market share. However, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate usage among the youth.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 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 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident about this group’s earnings growth potential. Since the end of August, the industry’s consensus earnings estimate for the current year has increased 2.3%.

Given the industry’s encouraging prospects, we present a few stocks one can buy or retain, given their business advancement endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Outpaces S&P 500 and Sector

The Zacks Tobacco industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.

The industry has gained 29.7% over this period compared with the S&P 500’s growth of 29%. The broader sector has risen 21.9% 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 12.22X compared with the S&P 500’s 18.79X and the sector’s 19.79X.

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

Persistent decline in cigarette sales remains a serious concern for tobacco companies. In such a scenario, expansion in RRPs along with price hikes is likely to offer respite. Moreover, companies are undertaking partnerships to augment offerings in low-risk products, and investing in research to advance in this space. 

All said, we are presenting a few stocks from the Zacks Tobacco industry, which are well positioned to capitalize on the opportunities.

Vector Group Ltd. (VGR - Free Report) : This Florida-based company currently sports a Zacks Rank #1 (Strong Buy). Some of the renowned cigarette brands of the company are Liggett, Pyramid and Grand Prix. It also offers e-cigarettes. The company has outperformed the Zacks Consensus Estimate by 72.3% in the trailing four quarters, on average. Further, Vector Group’s shares have rallied 48.1% over the past year. 

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

Price and Consensus: VGR

Philip Morris International Inc. (PM - Free Report) : This well-known tobacco player operates globally. The Zacks Rank #3 (Hold) stock has surged 34.7% in a year. The company’s IQOS is one of the leading RRPs in the industry. Renowned cigarette brands of the company are Marlboro, Parliament and Virginia Slims. Philip Morris has an estimated long-term earnings growth rate of 7.8%. It has outperformed the Zacks Consensus Estimate by 8.4%, on average, in the trailing four quarters.

Price and Consensus: PM

Altria Group, Inc. (MO - Free Report) : This tobacco biggie, also with a Zacks Rank #3, has an estimated long-term earnings growth rate of 6.4%. The company has a robust portfolio of cigarettes and RRPs. Markedly, it has formed a partnership with JUUL Labs Inc., a leading e-cigarettes maker, known for its advanced and highly-differentiated products.  It has also undertaken efforts to expand in the cannabis industry. Shares of Altria have gained 6.6% over the past year.

Price and Consensus: MO

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