Despite ESG scrutiny, the tobacco industry has been a wealth creator for investors. Although inflation has impacted tobacco sales, a rebound is expected with easing inflation. Additionally, new products like nicotine pouches and e-cigarettes will likely drive the long-term growth for tobacco companies.
Considering these factors, it could be worth investing in fundamentally strong tobacco stocks Turning Point Brands, Inc. (TPB), Japan Tobacco Inc. (JAPAY), and British American Tobacco p.l.c. (BTI).
Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
The tobacco industry faces challenges like falling smoking rates, high taxes, strict regulations, and health-related concerns. To address these, tobacco companies are developing and promoting safer alternatives like snus, e-cigarettes, and pouches.
Popularly known as Next Generation Products (NGPs), they separate nicotine from harmful smoke, offering a similar smoking experience. The global e-cigarette and vape market is set to reach $182.84 billion by 2030, growing at a CAGR of 30.6%, driven by increasing awareness of safe and ashless tobacco alternatives.
Notably, tobacco companies thrive because of tobacco's addictiveness, performing consistently during any economic cycle. This, along with their solid dividend yields, makes them relatively stable investments. The global tobacco market is expected to reach $1.25 trillion by 2028, growing at a CAGR of 3%.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Tobacco picks, beginning with the third choice.
Stock #3: Turning Point Brands, Inc. (TPB)
TPB manufactures, markets, and distributes adult consumer products. It operates through Zig-Zag Products, Stoker's Products, and NewGen Products segments. It markets and distributes rolling papers, tubes, finished cigars, make-your-own cigar wraps, moist snuff tobacco and loose-leaf chewing tobacco products, vapor products, and other products without tobacco and/or nicotine.
In terms of the trailing-12-month EBITDA margin, TPB’s 20.15% is 77.3% higher than the 11.36% industry average. Likewise, its 18.78% trailing-12-month EBIT margin is 138% higher than the industry average of 7.89%. Furthermore, the stock’s 9.71% trailing-12-month levered FCF margin is 178.2% higher than the industry average of 3.49%.
TPB’s net sales for the second quarter ended June 30, 2023, rose 2.6% year-over-year to $105.60 million. The company’s adjusted operating income came in at $21.43 million. Its adjusted net income increased 8.4% year-over-year to $15.30 million. Its adjusted EPS came in at $0.79, representing an increase of 12.9% year-over-year. In addition, its adjusted EBITDA rose 2.2% year-over-year to $25.28 million.
Analysts expect TPB’s revenue for the quarter ending March 31, 2024, to increase 1% year-over-year to $102 million. The stock has gained 2.5% year-over-year to close the last trading session at $21.08.
TPB’s positive outlook is reflected in its POWR Ratings. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value. Within the A-rated Tobacco industry, it is ranked #3 out of 9 stocks. To see TPB’s ratings for Growth, Momentum, Stability, Sentiment, and Quality, click here.
Stock #2: 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 73.1% higher than the 33.81% industry average. Likewise, its 24.86% EBIT margin is 214.9% higher than the 7.89% industry average. Additionally, the stock’s 13.61% trailing-12-month levered FCF margin is 289.8% higher than the industry average of 3.49%.
For nine months 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 ¥248.95, representing an increase of 9.5% year-over-year.
For the fiscal 2023 analysts expect JAPAY’s revenue to increase 346% year-over-year to $18.18 billion. Its EPS for the fiscal 2024 is expected to increase 11.1% year-over-year to $0.01. Over the past year, the stock has gained 33.6% to close the last trading session at $12.42.
JAPAY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Stability and a B for Quality. It is ranked #2 in the same industry. To see JAPAY’s Growth, Value, Momentum, and Sentiment ratings, 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.
In terms of the trailing-12-month net income margin, BTI’s 31.06% is 594.9% higher than the 4.47% industry average. Likewise, its 48.10% EBIT margin is 509.3% higher than the 7.89% industry average. Additionally, the stock’s 11.94% trailing-12-month Return on Common Equity is 2.2% higher than the industry average of 11.68%.
BTI’s revenue for six months ended June 30, 2023, increased 4.4% year-over-year to £13.44 billion ($16.63 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.35 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.18 billion).
The company’s profit rose 108.2% year-over-year to £4.04 billion ($5 billion). Also, its EPS came in at 176p, representing an increase of 117.8% year-over-year.
Street expects BTI’s EPS and revenue for the fiscal year ending December 31, 2023, to increase 0.8% and 1.3% year-over-year to $4.52 and $33.93 billion, respectively. Over the past month, the stock has gained 3% to close the last trading session at $31.09.
BTI’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked first in the Tobacco industry. It has a B grade for Value, Stability, and Quality. Click here to see BTI’s Growth, Momentum, and Sentiment ratings.
What To Do Next?
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BTI shares were trading at $30.99 per share on Monday morning, down $0.10 (-0.32%). Year-to-date, BTI has declined -17.50%, versus a 15.13% 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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