Despite being on the receiving end of stringent ESG standards, tobacco stocks have been significant wealth creators for investors over the past few decades. Since last year, high inflation has affected cigarette sales. However, with inflation easing considerably from last year’s peak, cigarette sales are likely to grow.
Amid this backdrop adding fundamentally strong tobacco stocks Altria Group, Inc. (MO), British American Tobacco p.l.c. (BTI), and Vector Group Ltd. (VGR) to one’s watchlist could be wise.
Before diving deeper into the fundamentals of these stocks, let’s take a closer look at the state of the tobacco industry.
The tobacco industry faces several challenges, such as declining smoking rates, high inflation, government regulations, health-related concerns, etc. On the other hand, tobacco companies are developing newer, less risky offerings such as snus, e-cigarettes, vaporizers, etc.
E-cigarettes are sweeping the globe because they provide a smoking-like experience with significantly less harm. E-cigarette use grew nearly 6% last year compared to 4.9% in 2021. High inflation has been a major challenge for the tobacco industry. The consumer price index for May rose 4% year-over-year, the lowest in nearly two years. The rapidly cooling inflation could boost tobacco consumption.
The tobacco market is projected to grow at a CAGR of 3.8% to reach $173.03 billion by 2027.
Considering these factors, it could be wise to add these stocks to one’s watchlist.
Let’s take a closer look at their fundamentals.
Altria Group, Inc. (MO)
MO manufactures and sells smokeable and oral tobacco products. They offer cigarettes under the Marlboro brand, cigars and pipe tobacco under the Black & Mild brand, and moist smokeless tobacco and snus products under brands like Copenhagen, Skoal, Red Seal, and Husky.
On June 1, 2023, MO completed the acquisition of NJOY Holdings, Inc.
MO’s CEO Billy Gifford said, “The completion of this transaction is a transformative step in our goal of Moving Beyond Smoking. We are pleased to have received antitrust clearance, and we are now fully focused on responsibly accelerating U.S. adult smoker and adult vaper adoption of NJOY ACE, currently, the only pod-based e-vapor product to receive marketing authorization from the FDA.”
In terms of the trailing-12-month net income margin, MO’s 27.10% is 759% higher than the 3.16% industry average. Likewise, its 60.79% trailing-12-month EBITDA margin is 517.5% higher than the industry average of 9.85%. Furthermore, the stock’s 27.25% trailing-12-month levered FCF margin is 828.5% higher than the industry average of 2.93%.
MO’s net revenues for the first quarter ended March 31, 2023, came at $5.72 billion. Its oral tobacco products net revenues rose 2.4% year-over-year to $628 million. The company’s adjusted net income increased 3.5% year-over-year to $2.12 billion. Also, its adjusted EPS came in at $1.18, representing an increase of 5.4% year-over-year.
Street expects MO’s EPS and revenue for the quarter ending June 30, 2023, to increase 4.1% and 1.5% year-over-year to $1.31 and $5.46 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 5.2% to close the last trading session at $43.95.
MO’s POWR Ratings reflect strong prospects. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 10 stocks in the A-rated Tobacco industry. It has an A grade for Quality and a B for Growth. Click here to see MO’s rating for Value, Momentum, Stability, and Sentiment.
British American Tobacco p.l.c. (BTI)
Headquartered in London, the United Kingdom, BTI provides tobacco and nicotine products to consumers worldwide. It offers vapour, tobacco heating, and modern oral nicotine products; combustible cigarettes; and traditional oral products, such as snus and moist snuff. The company offers its products under the Vuse, glo, Velo, Grizzly, Kodiak, Dunhill, Kent, etc brands.
In terms of the trailing-12-month net income margin, BTI’s 24.10% is 664% higher than the 3.16% industry average. Likewise, its 42.17% EBIT margin is 532.5% higher than the 6.67% industry average. Additionally, the stock’s 24.08% trailing-12-month levered FCF margin is 720.6% higher than the industry average of 2.93%.
BTI’s revenue for the fiscal year ended December 31, 2022, increased 7.7% year-over-year to £27.66 billion ($34.98 billion). Its profit from operations increased 2.8% year-over-year to £10.52 billion ($13.30 billion). Its net cash generated from operating activities increased 7% year-over-year to £10.39 billion ($13.14 billion). Also, its EPS came in at pound 291.9p.
For the fiscal period ending December 31, 2023, BTI’s revenue is expected to increase 6.5% year-over-year to $35.69 billion. Over the past month, the stock has declined 4.2% to close the last trading session at $32.30.
BTI’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Sentiment. It is ranked #3 in the same industry. To see BTI’s ratings for Growth, Value, Momentum, Stability, and Quality, click here.
Vector Group Ltd. (VGR)
VGR manufactures and sells cigarettes. It operates in two segments: Tobacco and Real Estate. The company offers cigarettes under various brand names such as EAGLE 20’s, Pyramid, Montego, Grand Prix, Liggett Select, Eve, and USA, as well as partner and private label brands.
In terms of the trailing-12-month net income margin, VGR’s 17.11% is 442.2% higher than the 3.16% industry average. Likewise, its 36.02% trailing-12-month EBIT margin is 440.3% higher than the industry average of 6.67%. Furthermore, the stock’s 15.86% trailing-12-month levered FCF margin is 440.5% higher than the industry average of 2.93%.
VGR’s revenues for the first quarter ended March 31, 2023, increased 7.1% year-over-year to $334.15 million. Its adjusted EBITDA rose 1.3% over the prior-year quarter to $78.05 million. The company’s adjusted net income increased 28% year-over-year to $34.04 million. In addition, its adjusted EPS came in at $0.22, representing an increase of 29.4% year-over-year.
Analysts expect VGR’s EPS and revenue for the quarter ending June 30, 2023, to increase 32% and 5.4% year-over-year to $0.33 and $408.20 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 38% to close the last trading session at $12.76.
VGR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Quality. Within the Tobacco industry, it is ranked #4. To see VGR’s rating for Growth, Value, Momentum, Stability, and Sentiment, click here.
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MO shares were trading at $44.13 per share on Thursday afternoon, up $0.18 (+0.41%). Year-to-date, MO has gained 0.66%, versus a 15.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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