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3 Tobacco Stocks Grabbing Attention on Solid Industry Trends

The Zacks Tobacco industry participants have been focused on strengthening their arms in the smoke-free product arena owing to consumers’ rising health consciousness. Strong pricing power has also been working well for tobacco players.

These upsides have been helping companies navigate a tough industry landscape, wherein inflation has impacted Adult Tobacco Consumers’ (“ATC”) spending patterns, thereby affecting companies’ volumes. All said, Philip Morris International Inc. PM, Altria Group, Inc. MO and 22nd Century Group, Inc. XXII appear to be well-placed for growth.

About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as tobacco and nicotine-based products, such as cigars, snuffs and oral tobacco. Some companies also offer RRPs, such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are engaged in making devices and attachments needed in vaping and heat-not-burn products. Most products manufactured by the tobacco industry participants fall under the strict vigilance of the U.S. Food and Drug Administration (“FDA”) and are required to follow the permissible levels of nicotine in manufacturing. Players in this space sell products mostly through large retailers, distributors, convenience stores, drugstores, wholesalers and grocery chains. Additionally, some international tobacco firms operate in the country through subsidiaries.

4 Trends Shaping the Future of the Tobacco Industry

Pricing Power: Players in the tobacco industry have been leveraging the strong pricing influence of tobacco products, which also helps them make up for high taxes and soft cigarette sales volumes. Since smokers tend to be less responsive to price hikes due to their addiction, this approach is anticipated to continue benefiting companies within the tobacco sector. The prudent pricing of cigarettes has been supporting the revenues of players in the tobacco industry in the face of declining volumes.

Smoke-Free Products Gain Prominence: Rising health consciousness and stringent government regulations aimed at reducing cigarette smoking have driven many consumers toward reduced-risk products (RRPs) or smoke-free alternatives. These products are promoted as having a less adverse impact on health due to their scientific composition and way of consumption. An increasing number of consumers are turning to these alternatives as a means to quit smoking traditional cigarettes. Major players in the tobacco industry have been allocating resources to expand their presence in this category, including investing in innovations to make these products more user-friendly and energy-efficient. Companies have been experiencing significant revenue growth in the RRP or smoke-free product space. Philip Morris and British American Tobacco have been proactively working toward transitioning into predominantly smoke-free companies in the coming years. The resilience of these products is likely to continue delivering favorable outcomes for industry participants as they undergo business transformations.

Cigarette Volume Concerns: The industry is battling challenges related to the inflationary environment, which has influenced consumer spending habits. Given the ever-changing external landscape, economic factors like inflation, increased interest rates, global supply-chain hurdles and ATC dynamics, such as purchasing patterns, the adoption of smoke-free products and disposable income, are likely to impact cigarette sales volumes. Further, cigarette volumes have been affected by strict government regulations pertaining to sales, marketing and manufacturing. Such regulatory norms are imposed due to health hazards caused by the consumption of nicotine. Some guidelines issued by the FDA include the mandatory use of precautionary labels on cigarette packets and self-critical advertisements. As cigarette sales constitute a significant portion of revenues for tobacco industry companies, the decrease in sales volumes within this category raises concerns.

Cost Pressures: The performance of numerous industry participants has been adversely affected by cost inflation. Global inflationary challenges linked to essential materials such as tobacco leaf, energy and labor costs have been a worry. Elevated expenses related to the research, development and marketplace activities of smoke-free products further present risks to profit margins.


Zacks Industry Rank Indicates Good Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #104, which places it in the top 41% 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 outperform the bottom 50% by a factor of more than 2 to 1.

Industry vs. Broader Market

The Zacks Tobacco industry has underperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staple sector over the past year.

The industry has declined 13.7% over this period compared with the broader sector’s drop of 3.9%. Meanwhile, the S&P 500 has risen 26.4% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staple stocks, the industry is currently trading at 9.29X compared with the S&P 500’s 20.61X and the sector’s 17.34X.

Over the past five years, the industry has traded as high as 13.18X, as low as 9.1X and at the median of 10.79X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

3 Tobacco Stocks to Keep a Close Eye On

Philip Morris International: The company has been benefiting from its robust pricing actions. Additionally, this Zacks Rank #3 (Hold) company’s focus on smoke-free products, aligning with changing consumer preferences, has helped it firm its position. Philip Morris is on track to achieve its goal of transitioning into a primarily smoke-free entity by 2025. The company expects 2024 to be another strong year, backed by organic smoke-free net revenue and profit growth. The success of the company’s smoke-free portfolio is led by the outstanding performance of flagship premium brands, IQOS and ZYN. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for PM’s 2024 EPS has dropped from $6.45 to $6.40 in the past seven days. Shares of Philip Morris have slipped 3.1% in the past six months.

Price and Consensus: PM

Altria Group: The Zacks Rank #3 company has been showing resilience amid a tough landscape through its pricing power and focus on smoke-free alternatives. Altria’s investment in on! is proving to be fruitful in this regard. The acquisition of NJOY Holdings marks another significant development in the e-vapor category. MO highlighted its 2028 Enterprise Goals at its 2023 Investor Day, as part of which it targets generating mid-single-digit adjusted EPS growth through 2028 (on a compounded annual basis).

Altria shares have declined 5.8% in the past six months. The Zacks Consensus Estimate for MO’s 2023 EPS has dipped by a penny to $5.07 over the past seven days.

Price and Consensus: MO

22nd Century Group: The agricultural biotechnology company is renowned for its efforts in reducing tobacco harm and developing reduced nicotine tobacco products. This Zacks Rank #3 company has been on track to reduce operating costs. Incidentally, 22nd Century Group recently divested its hemp/cannabis operations, which will help it lower its cost burden considerably, taking the company closer to its goal of generating cash-positive operations.

The Zacks Consensus Estimate for 22nd Century Group’s 2024 bottom line has remained unchanged at a loss of $4.30 over the past 30 days. Shares of XXII have declined 92% in the past six months.

Price and Consensus: XXII

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