4 Tobacco Stocks to Watch Amid Rising Popularity of RRPs

The Zacks Tobacco industry is likely to gain from the rising demand for low risk products such as vaping, e-cigarettes and heat-not-burn variants. These products, owing to their beneficial claims, are largely being accepted by those looking to quit or reduce cigarette consumption. Companies like Philip Morris International Inc. (PM), Altria Group, Inc. (MO), Vector Group Ltd. (VGR) and Turning Point Brands, Inc. (TPB) have been benefiting from the popularity of such products.

However matters are not so encouraging when it comes to cigarettes, which is bearing the brunt of tightening regulations and rising health consciousness. Nonetheless, pricing power is helping some of the tobacco companies to make up for part of the lost ground.

About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as other tobacco and nicotine-based products such as cigars, snuffs, oral tobacco and e-cigarettes. Some firms are also engaged in making vaping and tobacco heating devices. Players in this space sell products mostly through large retailers, distributors, convenience stores, wholesalers and grocery chains.

3 Trends Shaping the Future of Tobacco Industry

Low Risk Products are an Ace in the Stack: E-cigarettes and other vaping products are gaining immense popularity, courtesy of their low-risk claims. In fact, consumers are increasingly taking to such products in a bid to quit cigarettes. Driven by the growing enthusiasm, tobacco companies are making substantial investments in the reduced risk products (RRPs) arena. Companies are engaging in innovations to make these products user friendly and energy efficient. RRPs are expected to continue aiding tobacco players to partially counter the declines in cigarette category and thereby stay afloat. However, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate usage among the youth.

Tobacco Sales Volumes Disappoint: Strict government regulations owing to health hazards from the use of nicotine have been affecting cigarette sales volumes. Some of the guidelines issued by the FDA include 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. Such trends are likely to keep cigarette sales under pressure. Moreover, the ongoing COVID-19 pandemic poses the risk of serious lung diseases, which are likely to get exacerbated by smoking. Additionally, pandemic-led travel restrictions and sluggish store traffic as well as production limitations have been adversely impacting sales volumes.

Pricing Power a Major Support: Companies in the space are likely to continue benefiting from the pricing power of tobacco products. Incidentally, industry participants have been resorting to price hikes to make up for the sluggish demand and high taxes. As smokers don’t mind a price hike owing to their addiction, this strategy is likely to work for players in the tobacco space. Markedly, effective pricing strategies have been supporting revenues and operating income for tobacco players.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #45, which places it in the top 18% 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 bright 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 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 May 30, 2020, the industry’s earnings estimate for the current year has increased 2.3%.

Given the industry’s encouraging prospects, we present a few stocks one can buy or retain, given their business advancement endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Vs. Broader Market

The Zacks Tobacco industry has lagged the Zacks S&P 500 composite but has performed better than the broader Zacks Consumer Staples sector over the past year.

The industry has gained 3.7% over this period compared with the S&P 500’s rise of 13.1%. Meanwhile, the broader sector has lost 4% in the said time frame.

One-Year Price Performance

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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 10.58X compared with the S&P 500’s 22.39X and the sector’s 19.98X.

Over the past five years, the industry has traded as high as 21.23X, as low as 9.96X and at the median of 15.45X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

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4 Tobacco Stocks to Keep a Close Eye on

We are suggesting a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy) stock from the Zacks Tobacco industry. We are also presenting two stocks with a Zacks Rank #3 (Hold) each from the same industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s take a look.

Turning Point Brands: This Kentucky based tobacco company manufactures and markets a wide range of products under three segments namely; Smokeless, Smoking and NewGen Products. This Zacks Rank #1 company’s smokeless product category has been gaining from rising same store sales of Stoker’s MST. Its NewGen segment has been witnessing sharp growth on the back of elevated e-commerce sales. The company is well positioned to gain from the growth in smokeless products and has been on track with product introductions. Recently, it submitted Premarket Tobacco Applications to the FDA for 250 products in the vapor category. Importantly, Turning Point has seen upward estimate revisions for its 2020 bottom line over the past 60 days by 18.6%. Moreover, the company has a trailing four-quarter earnings surprise of 19.1%, on average. Impressively, the stock has rallied about 21.4% in the past year.

Price and Consensus: TPB

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Vector Group: This Florida-based company currently carries a Zacks Rank #2. Some of the renowned cigarette brands of the company are Liggett, Pyramid and Grand Prix. Markedly, Liggett’s retail market share increased to 4.3% during the second quarter of 2020. The company’s Zoom e-cigarette, which falls under Liggett’s brand group, has also been doing well. Backed by strong brands, the company has been witnessing growth in its conventional cigarette (wholesale) shipment volumes. Markedly, the Zacks Consensus Estimate for earnings for fiscal 2020 has remained stable in the past 30 days. Moreover, Vector Group’s bottom line has surpassed the Zacks Consensus Estimate by a wide margin over the trailing four quarters. The stock has declined 13.6% in a year.

Price and Consensus: VGR

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Philip Morris International: The company’s IQOS is one of the leading RRPs in the industry. In fact, total users of IQOS as of the end of second-quarter 2020 were estimated to be about 15.4 million. Additionally, some of the renowned cigarette brands of the company are Marlboro, Parliament and Virginia Slims. This Zacks Rank #3 company has long been benefiting from its strong pricing power, which has aided revenues and adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes. Philip Morris has an estimated long-term earnings growth rate of 7.1%. Its bottom line has outperformed the Zacks Consensus Estimate by 5.7%, on average, in the trailing four quarters. Markedly, the company witnessed upward estimate revisions for its 2020 bottom line over the past 60 days by 3%. Impressively, this renowned global tobacco player has gained about 12.1% in the past year.

Price and Consensus: PM

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Altria Group: The company has a robust portfolio of cigarettes, RRPs and oral tobacco products. It has also undertaken efforts to expand in the cannabis industry. The marketing and technology sharing agreement between Altria and Philip Morris, pertaining to the sale of IQOS in the United States has been yielding results. Apart from this, the company’s HeatSticks has also been performing well. The company has been on track with the expansion of its oral tobacco products. It is also progressing well with cost-reduction initiatives. Markedly this tobacco biggie, with a Zacks Rank #3, has an estimated long-term earnings growth rate of 4%. Altria’s earnings have outperformed the Zacks Consensus Estimate by 2.7%, on average, in the trailing four quarters. The company witnessed upward estimate revisions for its 2020 bottom line over the past 60 days by 1.4%. The stock has gained about 3.3% in the past year.

Price and Consensus: MO

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Vector Group Ltd. (VGR) : Free Stock Analysis Report
 
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