Advertisement
Canada markets close in 2 hours 51 minutes
  • S&P/TSX

    22,178.88
    +71.80 (+0.32%)
     
  • S&P 500

    5,253.16
    +4.67 (+0.09%)
     
  • DOW

    39,779.74
    +19.66 (+0.05%)
     
  • CAD/USD

    0.7389
    +0.0017 (+0.23%)
     
  • CRUDE OIL

    82.78
    +1.43 (+1.76%)
     
  • Bitcoin CAD

    95,774.50
    +2,237.88 (+2.39%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,240.80
    +28.10 (+1.27%)
     
  • RUSSELL 2000

    2,128.06
    +13.71 (+0.65%)
     
  • 10-Yr Bond

    4.1890
    -0.0070 (-0.17%)
     
  • NASDAQ

    16,385.66
    -13.87 (-0.08%)
     
  • VOLATILITY

    12.99
    +0.21 (+1.64%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • CAD/EUR

    0.6837
    +0.0032 (+0.47%)
     

3 Tobacco Stocks to Watch on Impressive Industry Trends

Payers in the Tobacco industry have been benefiting from their strong pricing power, which has been working well amid cost inflation as well as low cigarette volumes. Also, focus on reduced risk products (RRPs) or smoke-free alternatives has been working well for companies, given consumers’ rising health consciousness.

While stern government regulations are a limiting factor, the abovementioned upsides and constant innovation bode well for companies like Philip Morris International Inc. PM, British American Tobacco p.l.c. BTI and Turning Point Brands, Inc. TPB.


About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as tobacco and nicotine-based products such as cigars, snuffs and oral tobacco. Some companies also offer reduced-risk products such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are also engaged in making devices and attachments needed in vaping and heat-not-burn products. Most of the products manufactured by the tobacco industry participants fall under the strict vigilance of the U.S. Food and Drug Administration (FDA) and are required to follow the permissible levels of nicotine in manufacturing. Players in this space sell products mostly through large retailers, distributors, convenience stores, drugstores, wholesalers and grocery chains. Additionally, some international tobacco firms operate in the country through subsidiaries.

4 Trends Shaping the Future of the Tobacco Industry

Pricing Power a Key Driver: Industry participants have been gaining from the solid pricing power of tobacco products, which also help them make up for high taxes and sometimes even lower cigarette sales volumes. As smokers don’t mind a price hike due to their addiction, this strategy is likely to keep working for players in the tobacco space. The high pricing of cigarettes has been supporting revenues and operating income of some of the players in the tobacco industry.

ADVERTISEMENT

Low-Risk Products Gain Prominence: Low-risk tobacco alternatives, also referred to as next-generation tobacco products, have been gaining immense popularity. Compared to cigarettes, these products are claimed to be less detrimental to health owing to their scientific composition and manner of use. Consumers are increasingly taking to such products in a bid to quit cigarettes. Tobacco biggies have been witnessing substantial revenue growth in the RRPs arena. The companies are making investments to expand in this category, such as undertaking innovations to make these products user-friendly and energy efficient. The performance of tobacco players is expected to continue benefiting from RRPs. That said, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate their usage among the youth.

Strict Government Regulations: Cigarette volumes are being affected by strict government regulations pertaining to sales, marketing and manufacturing. Such regulatory norms are imposed due to the health hazards caused by the consumption of nicotine. Some of the guidelines issued by the FDA include the 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. Since cigarette sales account for the majority of revenues for companies in the tobacco industry, dwindling sales volumes in this category are a concern.

Cost Inflation: An overall inflationary cost scenario has been hurting the performance of many industry players. Companies are witnessing elevated inflation rates due to rising global energy, commodity and food prices due to factors like demand-supply imbalances, labor shortage and the Ukraine war. Apart from these, hurdles in the supply and distribution channels stemming from the pandemic and the Ukraine war have been impacting the availability and cost of certain raw materials. Increased logistic costs remain a concern for a number of companies operating in the space.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Tobacco industry is housed within the broader Zacks sector. The industry currently carries a Zacks Industry Rank #35, which places it in the top 14% 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of December 2022, the industry’s earnings estimate for 2023 has improved marginally by 0.4%.

Let’s take a look at the industry’s performance and current valuation.

Industry Vs. Broader Market

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 declined 3.7% over this period compared with the broader sector’s drop of 4.5%. Meanwhile, the S&P 500 has declined 19.1% 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 11.54X compared with the S&P 500’s 17.33X and the sector’s 19.16X.

Over the past five years, the industry has traded as high as 17.72X, as low as 9.15X and at the median of 11.33X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

3 Tobacco Stocks to Keep a Close Eye on

Philip Morris International: This Zacks Rank #2 (Buy) company is one of the industry pioneers in driving the shift from cigarettes to RRPs. The company is committed to expanding its products to more markets. It has also been making radical progress in the respiratory drug delivery platform as part of the “Beyond Nicotine" strategy. Moreover, Philip Morris has been benefiting from its strong pricing of tobacco products.

Shares of Philip Morris have rallied 9% in the past six months. The Zacks Consensus Estimate for PM’s 2023 earnings per share has increased by 2.1% in the past 60 days.

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

Price and Consensus: PM

British American Tobacco: This tobacco and nicotine products company has been benefiting from its concentration on product launches and innovation, along with geographic expansion. Strong pricing, scale of brands and prudent marketing investments have also been working well for British American Tobacco. Further, BTI’s focus on transformation, backed by its New Categories' performance, bodes well.

The Zacks Consensus Estimate for British American Tobacco’s 2023 bottom line has been stable over the past 30 days. Shares of the Zacks Rank #3 (Hold) company have declined 4.4% in the past six months.

Price and Consensus: BTI

Turning Point Brands: This manufacturer, marketer and distributor of branded consumer products, such as alternative smoking accessories and consumables, currently carries a Zacks Rank #3. The company is gaining from its wide market presence, including its online operations. Turning Point Brands’ Zig-Zag and Stoker’s product segments have been performing well even amid an inflationary scenario, depicting inherent strength.

Turning Point Brands’ shares have dropped 23.5% in the past six months. The Zacks Consensus Estimate for TPB’s 2023 EPS has remained unchanged over the past 30 days.

Price and Consensus: TPB

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Philip Morris International Inc. (PM) : Free Stock Analysis Report

British American Tobacco p.l.c. (BTI) : Free Stock Analysis Report

Turning Point Brands, Inc. (TPB) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research