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Tobacco Industry Outlook Smoking Hot on Pricing & RRP Focus

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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:

  • Stringent government regulations owing to health hazards from the use of nicotine have been affecting cigarette sales volumes. 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. Such trends are likely to keep cigarette sales under pressure.
     
  • Companies are likely to benefit from their efficient pricing strategy. Incidentally, they have been resorting to price hikes to make up for the slack in demand and high taxes. As smokers don’t mind a price hike owing to their addiction, this strategy is likely to work for players in the tobacco space. In fact, the addictive nature of tobacco products has kept demand steady even amid the coronavirus pandemic – thanks to stock piling consumers. However, travel restrictions in the wake of the virus outbreak as well as government-imposed temporary shutdowns or production limitations may impact performance of some companies 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. 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 #61, which places it in the top 24% 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 solid 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.

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 Underperforms 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 17.9% over this period compared with the S&P 500’s drop of 1.4%. The broader sector has lost 13.7% 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 10.09X compared with the S&P 500’s 20.42X and the sector’s 18.51X.

Over the past five years, the industry has traded as high as 21.23X and at the median of 17.11X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)



Bottom Line

Receding cigarette volumes is a concern for tobacco companies. Nonetheless, expansion in RRPs along with efficient pricing is likely to offer respite. Moreover, companies are undertaking strong efforts to augment offerings in the oral tobacco product range, 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, on average, in the trailing four quarters. Further, Vector Group’s shares have rallied 17.3% 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 renowned global tobacco player currently carries a Zacks Rank #3 (Hold). 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 6.6%. It has outperformed the Zacks Consensus Estimate by 5.7%, 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 5%. The company has a robust portfolio of cigarettes and RRPs. It has also undertaken efforts to expand in the cannabis industry. Altria’s earnings have outperformed the Zacks Consensus Estimate by 2%, on average, in the trailing four quarters.

Price and Consensus: MO
 

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Vector Group Ltd. (VGR) - free report >>

Philip Morris International Inc. (PM) - free report >>

Altria Group, Inc. (MO) - free report >>