The tobacco industry faces global regulations due to health concerns, but with innovations like e-cigarettes and nicotine pouches, the industry anticipates long-term growth. Moreover, the decline in inflation is also expected to boost demand for various tobacco products.
Considering these factors, it could be wise to add fundamentally strong tobacco stocks Japan Tobacco Inc. (JAPAY), Altria Group, Inc. (MO), and British American Tobacco p.l.c. (BTI) to one’s watchlist.
Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
Despite various health risks, global tobacco consumption remains steady. The industry faces challenges such as high taxes and strict regulations on consumption and sale. Still, growth in demand is being fueled by the addictive nature of tobacco, changing lifestyles, and rising disposable incomes.
The steady demand for tobacco ensures the consistent performance of tobacco companies through economic cycles. The global tobacco market is projected to exceed $627 million in 2024. The market is further expected to grow at a CAGR of 3.4% to reach $878 million by 2034.
Moreover, tobacco companies are now banking on safer alternatives such as snus, e-cigarettes, and nicotine pouches to drive growth and appeal to a new customer base. Due to increased awareness of safe and smoke-free options, the global e-cigarette and vape market is set to reach $182.84 billion by 2030, growing at a CAGR of 30.6%.
Considering these conducive trends, let’s analyze the fundamentals of the three Tobacco watchlist additions, beginning with the third choice.
Stock #3: Japan Tobacco Inc. (JAPAY)
Headquartered in Tokyo, Japan, JAPAY manufactures and sells tobacco products, pharmaceuticals, and processed foods in Japan and internationally. The company operates through three segments: Tobacco Business, Pharmaceutical, and Processed Food.
On October 30, 2023, JAPAY unveiled Ploom X ADVANCED, its latest heated tobacco device in Japan, hitting stores on November 21, 2023, with pre-sales beginning on October 31, 2023. Ploom X ADVANCED boasts "POWER HEATFLOW" tech, fast automatic heating, extended battery life, and stylish black and silver designs.
Akira Yamaguchi, VP at JAPAY, said Ploom X ADVANCED aims to provide complete tobacco pleasure with improved taste and user-friendly automatic heating. It marks a milestone in JAPAY’s mission to enhance adult consumers' experiences and benefit society.
In terms of the trailing-12-month gross profit margin, JAPAY’s 58.53% is 75.3% higher than the 33.39% industry average. Likewise, its 24.54% EBIT margin is 195.6% higher than the 8.30% industry average. Additionally, the stock’s 14.93% trailing-12-month levered FCF margin is 221.7% higher than the industry average of 4.64%.
For nine months that ended September 30, 2023, JAPAY’s revenue increased 7.4% year-over-year to ¥2.16 trillion ($14.46 billion). Its adjusted operating profit increased 5.9% year-over-year to ¥664.40 billion ($4.45 billion). The company’s profit attributable to owners of JAPAY increased 9.5% year-over-year to ¥442.01 billion ($2.96 billion). Also, its EPS came in at ¥261.39, representing an increase of 4.8% year-over-year.
Analysts expect JAPAY’s revenue for the quarter ending June 30, 2024, to increase 2% year-over-year to $5.21 billion. Its EPS for fiscal 2024 is expected to increase 11.1% year-over-year to $0.01. Over the past year, the stock has gained 27.8% to close the last trading session at $12.82.
JAPAY’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Stability and a B for Momentum and Quality. Within the A-rated Tobacco industry, it is ranked #6 out of 9 stocks. In total, we rate JAPAY on eight different levels. Beyond what we stated above, we also have given JAPAY grades for Growth, Value, and Sentiment. Get all the JAPAY ratings here.
Stock #2: Altria Group, Inc. (MO)
MO manufactures and sells smokable 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.
In terms of the trailing-12-month gross profit margin, MO’s 69.44% is 107.9% higher than the 33.39% industry average. Likewise, its 24.02% trailing-12-month Return on Total Assets is 413% higher than the industry average of 4.68%. Furthermore, the stock’s 58.66% trailing-12-month levered FCF margin is significantly higher than the industry average of 4.64%.
MO’s net revenues for the third quarter ended September 30, 2023, came in at $6.28 billion. Its gross profit increased marginally year-over-year to $3.70 billion. Its adjusted net earnings and adjusted EPS came in at $2.28 and $1.28, respectively.
Street expects MO’s EPS and revenue for the quarter ending March 31, 2024, to increase 1.4% and 1.5% year-over-year to $1.20 and $4.83 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has declined 5% to close the last trading session at $40.33.
MO’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Quality and a B for Momentum. Within the same industry, it is ranked #5. To see MO’s ratings for Growth, Value, Stability, and Sentiment, click here.
Stock #1: British American Tobacco p.l.c. (BTI)
Headquartered in London, the United Kingdom, BTI provides tobacco and nicotine products to consumers worldwide. It offers vapor, tobacco heating, modern oral nicotine products, combustible cigarettes, and traditional oral products like snus and moist snuff. The company provides its products under the Vuse, glo, Velo, Grizzly, Kodiak, Dunhill, and Kent brands.
On November 6, 2023, BTI announced a deeper strategic partnership with Organigram, a prominent Canadian cannabis producer. BTI's subsidiary plans to invest £74 million ($93.99 million) from January 2024 to January 2025, increasing its equity in Organigram from 19% to 45%. The investment targets enhanced product development collaboration, emphasizing cutting-edge R&D and innovation.
In terms of the trailing-12-month net income margin, BTI’s 31.06% is 551.4% higher than the 4.77% industry average. Likewise, its 48.10% EBIT margin is 479.5% higher than the 8.30% industry average. Additionally, the stock’s 11.94% trailing-12-month Return on Common Equity is 5.9% higher than the industry average of 11.27%.
BTI’s revenue for six months ended June 30, 2023, increased 4.4% year-over-year to £13.44 billion ($17.07 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.54 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.29 billion).
The company’s profit rose 108.2% year-over-year to £4.04 billion ($5.13 billion). Also, its EPS came in at 176p, representing an increase of 117.8% year-over-year.
For fiscal 2023, BTI’s EPS and revenue are expected to increase 4.2% and 4.9% year-over-year to $4.67 and $35.14 billion, respectively. Over the past month, the stock has declined 1.4% to close the last trading session at $29.48.
It’s no surprise that BTI has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 in the Tobacco industry. It has an A grade for Sentiment and a B for Momentum and Stability. Click here to see BTI’s Growth, Value, and Quality ratings.
What To Do Next?
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MO shares were trading at $40.53 per share on Monday morning, up $0.20 (+0.50%). Year-to-date, MO has gained 0.47%, versus a 1.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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