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Altria versus Reynolds: Tobacco Stock On Fire in Volatility

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The U.S. market is on a roller coaster ride with recent events spiking up volatility. Speculation surrounding the Fed rate hike and volatile gasoline prices triggered by ‘critical’ gas supply are now accompanied by the debate on ‘Brexit’.

Uncertainties Persist: Brexit Fear and Fed Decision

The recent buzzword in the global economy is Brexit or Britain’s exit from the European Union. Recent polls indicate that the ‘Leave’ campaign is stronger than ‘Remain’. A Brexit will start a long and complicated process resulting in a fundamental change in U.K.’s relationship with the other EU members. This is also expected to increase the cost of trade and services for Britain across international borders. For the world economy, Brexit may be followed by prolonged uncertainty that could dent growth and trigger losses in the global financial market.

Meanwhile, the Fed did not increase interest rates in its recently concluded two day long meeting following lower-than-expected U.S. non-farm payroll data. Moreover, the upcoming Presidential elections are likely to stall Fed’s decision of raising the interest rate until Nov 2016.

The looming uncertainty has made investors jittery about investing in high risk profile stocks. Moreover, they are resorting to government bonds and gold. But little did anyone guess that tobacco would send smoke signals of safety in investment.

Tobacco: A Safe Haven

Even though a little unorthodox, tobacco seems to be a relatively safer sector to invest in at present. These companies stand to benefit from the addictive nature of tobacco. Smoking rates have, in general, been declining in the developed countries, while rising in the developing ones. This figure is expected to grow and translate into steady sales and attractive yields for investors.

Let us consider two tobacco stocks – Altria Group Inc. (MO - Free Report) and Reynolds American Inc.  with a Zacks Rank #2 (Buy) – and decide on the one to bank on in this volatile market.

Altria’s Start to FY16  

Altria made a strong start to fiscal 2016 with both its top- and bottom-lines improving year over year backed by higher shipments and retail share gains by its flagship brand Marlboro. Supported by lower excise tax, gross profit and operating income increased year over year during the period.

Altria upgraded its shopping website – marlboro.com – which provides engaging content directly to adult smokers through mobile devices. Further, in first-quarter 2016, PM USA, the subsidiary of Altria expanded the distribution of Marlboro Midnight Menthol nationally, offering adult smokers a strong menthol flavor. The variant has already received favorable response in the test market. These initiatives helped Marlboro gain a leadership.

Further, during the quarter, Altria’s subsidiary Nu Mark LLC (Nu Mark) stepped up the distribution of MarkTen XL and Green Smoke e-vapor products across several lead markets. Altria’s joint venture with Philip Morris International Inc. (PM - Free Report) to develop a modified risk tobacco product is on track and the companies are scheduled to submit application for launching the product to the U.S. Food and Drug Administration (FDA) by the end of 2016.

How is 2016 Going for Reynolds?

Reynolds also reported higher year-over-year earnings and sales in first-quarter 2016 backed by increased cigarette and moist snuff pricing. It’s impressive brand portfolio of tobacco products helps it to maintain strong business momentum and generate decent profits. Further, the company invests continuously in innovation and brand building, which have helped it to maintain its leading position in the industry.

What do the Numbers Say

In terms of share price, Altria is racing ahead with a 12.23% appreciation year-to-date in 2016 against Reynold’s appreciation of almost 11.79%.

However, with regard to long-term growth, Reynolds seems to have the lead. Its estimated long-term growth rate is 12.20%, which is way ahead the industry growth rate of 9.10%. Also, it is better than Altria’s long-term growth rate of 7.5%, which is behind the industry growth rate.

As per our style score system, Altria has better growth prospects than Reynolds. Our Growth Style Score condenses all the essential metrics from a company’s financial statement to get a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) offer the best investment opportunities in the growth investing space.

Altria has a Growth Style Score of ‘A’ while Reynolds carries a Growth Style Score of ‘D.’

But both stocks are overvalued as is evident from their unfavorable P/E and P/S ratios compared with the homebuilding industry.

Reynolds’ P/E ratio is 21.50 while that of Altria is 21.41. On the other hand, the P/E ratio of the industry is 19.43. Altria’s P/S ratio is 6.55 while that of Reynolds’ is 5.66 compared to the industry average of 5.01.

Tobacco stocks reward investors with attractive yields. While Altria’s dividend yields 3.46%, Reynolds American has a dividend yield of 3.32%.

 

 

 

Is it a Tie?

Without doubt, both Altria and Reynolds have delivered the goods in 2016 and have their own share of strengths and weaknesses. Choosing between them is difficult and either of them would be rewarding as an investment.

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