Despite facing scrutiny under ESG standards, the tobacco industry is growing, thanks to its historical track record as a wealth creator for investors. Although recent inflation pressures have affected cigarette sales, they are expected to rebound as inflation eases. Furthermore, introducing products like nicotine pouches and e-cigarettes will likely boost demand for tobacco companies.
Considering these factors, it could be wise to buy fundamentally strong tobacco stocks Turning Point Brands, Inc. (TPB), Vector Group Ltd. (VGR), Altria Group, Inc. (MO), 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 confronts numerous challenges, including declining smoking rates, high tax rates, government regulations, and health-related concerns. In order to contend with these challenges, tobacco companies are also actively developing and promoting newer, less risky products called next-generation products, which include snus, e-cigarettes, pouches, etc.
These NGPs have been designed to separate nicotine from harmful tobacco smoke, but they are known to provide the same smoking experience. The global e-cigarette and vape market is projected to grow at a CAGR of 30.6% to reach $182.84 billion by 2030. This growth is anticipated to be fuelled by increased consumer awareness of smokeless, safe, and ashless tobacco alternatives.
The reason tobacco companies continue to generate sustained profits is due to the addictive nature of tobacco. The tobacco industry performs well during any economic cycle. The global tobacco market is forecasted to grow at a CAGR of 3% to reach $1.25 trillion by 2028, primarily due to the increasing number of smokers across various countries.
Considering these conducive trends, let’s analyze the fundamental aspects of the five Tobacco picks, beginning with the fifth choice.
Stock #5: 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 97% higher than the 10.23% industry average. Likewise, its 18.78% trailing-12-month EBIT margin is 158.8% higher than the industry average of 7.26%. Furthermore, the stock’s 9.71% trailing-12-month levered FCF margin is 185.1% higher than the industry average of 3.41%.
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. Its EPS for the fiscal 2024 is expected to increase 1.3% year-over-year to $2.61. Over the past six months, the stock has gained 18.1% to close the last trading session at $24.50.
TPB’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. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Quality. Within the A-rated Tobacco industry, it is ranked #5 out of 10 stocks. To see TPB’s ratings for Growth, Value, Momentum, Stability, and Sentiment, click here.
Stock #4: 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 17.18% is 327.3% higher than the 4.02% industry average. Likewise, its 37.43% trailing-12-month EBIT margin is 415.8% higher than the industry average of 7.26%. Furthermore, the stock’s 12.20% trailing-12-month levered FCF margin is 258.2% higher than the industry average of 3.41%.
For the second quarter ended June 30, 2023, VGR’s total revenues came in at $365.66 million. Its adjusted EBITDA came in at $94.12 million. The company’s adjusted net income increased 26.2% year-over-year to $50.76 million. In addition, its adjusted EPS came in at $0.32, representing an increase of 28% year-over-year.
For the quarter ending September 30, 2023, VGR’s EPS and revenue are expected to increase 34.6% and 2.5% year-over-year to $0.32 and $387.50 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 6.8% to close the last trading session at $10.74.
It’s no surprise that VGR has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value and Quality. Within the same industry, it is ranked #4. In total, we rate VGR on eight different levels. Beyond what we stated above, we also have given VGR grades for Growth, Momentum, Stability, and Sentiment. Get all the VGR ratings here.
Stock #3: 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 announced the completion of the acquisition of NJOY Holdings, Inc.
Billy Gifford, CEO at MO, 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 gross profit margin, MO’s 69.44% is 112.9% higher than the 32.61% industry average. Likewise, its 59.46% trailing-12-month EBITDA margin is 481.4% higher than the industry average of 10.23%. Furthermore, the stock’s 42.91% trailing-12-month levered FCF margin is significantly higher than the industry average of 3.41%.
MO’s net revenues for the second quarter ended June 30, 2023, came at $6.51 billion. Its gross profit increased 2.5% year-over-year to $3.76 billion. Its adjusted net earnings rose 2.8% year-over-year to $2.35 billion. Also, its adjusted EPS came in at $1.31, representing an increase of 4% year-over-year.
Street expects MO’s EPS and revenue for the quarter ending September 30, 2023, to increase 1.9% and 0.8% year-over-year to $1.30 and $5.46 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has gained 2.6% to close the last trading session at $44.87.
MO’s positive outlook is 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 Quality and a B for Growth. It is ranked #3 in the Tobacco industry. To see MO’s Value, Momentum, Stability, and Sentiment ratings, 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 July 27, 2023, JAPAY announced the launch of "with 2," its new infused tobacco vapor device under the "with" brand. It will be will be sold in convenience and tobacco stores in Japan from September 5, 2023. "with 2" features JT's unique infused technology, offering instant tobacco vapor upon inhalation and a dual mode for varying vapor intensity.
In terms of the trailing-12-month gross profit margin, JAPAY’s 58.80% is 80.3% higher than the 32.61% industry average. Likewise, its 23.97% EBIT margin is 230.3% higher than the 7.26% industry average. Additionally, the stock’s 13.47% trailing-12-month levered FCF margin is 295.5% higher than the industry average of 3.41%.
For six months ended June 30, 2023, JAPAY’s revenue increased 9.9% year-over-year to ¥1.39 trillion ($9.48 billion). Its adjusted operating profit increased 6.7% year-over-year to ¥442.83 billion ($3.01 billion). The company’s profit for the period increased 8.9% year-over-year to ¥288.46 billion ($1.96 billion). Also, its EPS came in at ¥161.65, representing an increase of 8.7% year-over-year.
Analysts expect JAPAY’s revenue for the fiscal 2023 to increase 346.9% year-over-year to $18.21 billion. Over the past year, the stock has gained 32.1% to close the last trading session at $10.99.
JAPAY’s strong fundamentals are 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 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, Kent brands.
In terms of the trailing-12-month net income margin, BTI’s 31.06% is 672.3% higher than the 4.02% industry average. Likewise, its 48.10% EBIT margin is 562.7% higher than the 7.26% industry average. Additionally, the stock’s 11.94% trailing-12-month Return on Common Equity is 5.9% higher than the industry average of 11.28%.
BTI’s revenue for six months ended June 30, 2023, increased 4.4% year-over-year to £13.44 billion ($16.78 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.42 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.21 billion).
The company’s profit for the period rose 108.2% year-over-year to £4.04 billion ($5.04 billion). Also, its EPS came in at 176p, representing an increase of 117.8% year-over-year.
Street expects BTI’s fiscal 2023 revenue to increase 5.9% year-over-year to $35.50 billion. Its EPS for the fiscal 2024 is expected to increase 3.7% year-over-year to $4.58. Over the past three months, the stock has gained 4.1% to close the last trading session at $33.49.
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 Stability and Quality. Click here to see BTI’s Growth, Value, Momentum, and Sentiment ratings.
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MO shares were trading at $44.71 per share on Wednesday afternoon, down $0.16 (-0.36%). Year-to-date, MO has gained 1.99%, versus a 17.85% 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.
Top 5 Tobacco Stocks in the Industry This September StockNews.com
