Despite facing ESG scrutiny, the tobacco industry has proven to be a lucrative investment for stakeholders. Though inflationary pressures affected tobacco sales, a demand return is anticipated with the easing of inflation. Furthermore, the introduction of new products, such as nicotine pouches and e-cigarettes, is expected to play a pivotal role in driving long-term growth for tobacco companies.
Considering these factors, it could be worth investing in fundamentally strong tobacco stocks Vector Group Ltd. (VGR), British American Tobacco p.l.c. (BTI), and Turning Point Brands, Inc. (TPB).
Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
The tobacco industry faces various challenges, including declining smoking rates, elevated taxes, stringent regulations, and heightened health-related concerns. Tobacco companies are actively working to address these issues by developing and promoting safer alternatives such as snus, e-cigarettes, and pouches.
Commonly referred to as Next Generation Products (NGPs), these innovations effectively separate nicotine from harmful smoke, providing a comparable smoking experience. The global e-cigarette and vape market is poised to reach $182.84 billion by 2030, growing at a CAGR of 30.6%. The rising awareness of safe and smoke-free alternatives to traditional tobacco products will propel this growth.
Additionally, tobacco companies thrive due to the addictive nature of tobacco, ensuring consistent performance across economic cycles. The tobacco market is anticipated to grow at a 3.8% CAGR, reaching $173.03 billion by 2027.
Considering these conducive trends, let’s analyze the fundamentals of the three Tobacco picks, beginning with the third choice.
Stock #3: 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 18.65% is 280.8% higher than the 4.90% industry average. Likewise, its 36.96% trailing-12-month EBIT margin is 344.3% higher than the industry average of 8.32%. Furthermore, the stock’s 15.26% trailing-12-month levered FCF margin is 214.1% higher than the industry average of 4.86%.
For the third quarter ended September 30, 2023, VGR’s total revenues came in at $364.11 million. Its adjusted EBITDA rose 8.8% over the prior-year quarter to $94.93 million. The company’s adjusted net income increased 38.2% year-over-year to $52 million. In addition, its adjusted EPS came in at $0.33, representing an increase of 37.5% year-over-year.
For the fiscal year ending December 31, 2023, VGR’s EPS is expected to increase 8.3% year-over-year to $1.05, while its revenue for the year ending December 31, 2024, is expected to increase 6.3% year-over-year to $1.51 billion. Over the past month, the stock has gained 8.2% to close the last trading session at $11.09.
VGR’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 a B grade for Value and Quality. Within the A-rated Tobacco industry, it is ranked #5 out of 9 stocks. 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 #2: 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 ($93.66 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 gross profit margin, BTI’s 82.66% is 143.9% higher than the 33.89% industry average. Likewise, its 48.10% EBIT margin is 478.1% higher than the 8.32% 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 ($17.08 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.55 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.30 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.
Street expects BTI’s EPS and revenue for the fiscal year ending December 31, 2023, to increase 0.8% and 5.8% year-over-year to $4.52 and $35.45 billion, respectively. Over the past month, the stock has gained 6.6% to close the last trading session at $32.04.
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 #3 in the same industry. It has a B grade for Stability and Sentiment. Click here to see BTI’s Growth, Value, Momentum, and Quality ratings.
Stock #1: 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 20.72% is 84.4% higher than the 11.24% industry average. Likewise, its 19.26% trailing-12-month EBIT margin is 131.5% higher than the industry average of 8.32%. Furthermore, the stock’s 10.82% trailing-12-month levered FCF margin is 122.7% higher than the industry average of 4.86%.
TPB’s net sales for the third quarter ended September 30, 2023, came in at $101.72 million. The company’s adjusted operating income came in at $20.92 million. Its adjusted net income increased 1.6% year-over-year to $14.52 million. Moreover, its adjusted EPS came in at $0.76, representing an increase of 5.6% year-over-year.
Analysts expect TPB’s EPS for the quarter ending March 31, 2024, to increase 0.8% year-over-year to $0.63. Over the past month, the stock has gained 17.8% to close the last trading session at $23.52.
TPB’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 a B grade for Sentiment. Within the Tobacco industry, it is ranked first. To see TPB’s ratings for Growth, Value, Momentum, Stability, and Quality, click here.
What To Do Next?
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BTI shares were trading at $32.02 per share on Monday morning, down $0.02 (-0.06%). Year-to-date, BTI has declined -14.76%, versus a 20.29% 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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