The tobacco market has seen a significant uptick in smoking habits due to changing lifestyles and the addictive nature of cigarettes. Despite facing scrutiny from ESG standards, tobacco stocks have proven to be a lucrative investment over the years.

In this piece, I have evaluated why investors are vying for these fundamentally sound tobacco stocks, namely, Altria Group, Inc. (MO), Japan Tobacco Inc. (JAPAY), and Vector Group Ltd. (VGR).

While cigarette sales were impacted by high inflation, the recent easing of inflationary pressures suggests a potential rebound in sales. In 2023, the tobacco products market is expected to generate $106 billion in revenue, with cigarettes being the largest segment at $83 billion.

Moreover, the global tobacco market is expected to expand at a 3% CAGR to a whopping $1.25 trillion by 2028 owing to the growing number of smokers across countries.

On the other side, rising health consciousness and stern government regulations against cigarette smoking have pushed many consumers toward low-risk, reduced-risk products such as e-cigarettes, vaping, and heat-not-burn variants.

E-cigarettes have gained traction among youngsters as an alternative to traditional smoking with potentially reduced harm. According to a new report from the US Centers for Disease Control and Prevention, over 1 in 10 young adults in the United States regularly use e-cigarettes. Launching disposable e-cigarette products with fruit and candy flavors that appeal to younger audiences has flared in popularity.

Moreover, the global e-cigarette and vape market is expected to reach $182.84 billion by 2030, registering a CAGR of 30.6%. Consumer awareness of smokeless, safe, and ashless tobacco is predicted to drive industry growth.

MO, JAPAY, and VGR look well-positioned amid challenges associated with cost inflation and low cigarette volumes. Let’s take a closer look at the fundamentals of these stocks.

Altria Group, Inc. (MO)

MO manufactures and sells smokeable and oral tobacco products in the United States. It offers 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, the company acquired NJOY Holdings, Inc. paying $2.75 billion in cash, funded through a combination of a $2 billion term loan, commercial paper, and available cash.

Commenting on this, MO’s CEO Billy Gifford 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.”

During the fiscal 2023 second quarter (ended June 30), MO’s net revenues amounted to $6.51 billion, while its gross profit rose 2.5% from the year-ago value to $3.76 billion. Net earnings improved by 137.6% from the same period last year to $2.12 billion. Also, its adjusted earnings per share came in at $1.31, representing a 4% increase year-over-year.

The stock’s trailing-12-month levered FCF margin of 42.91% is significantly higher than the 3.38% industry average. Likewise, its 33.13% trailing-12-month net income margin is 769.5% higher than the industry average of 3.81%. Furthermore, the stock’s 69.44% trailing-12-month gross profit margin is 118.3% higher than the industry average of 31.81%.

Analysts expect MO’s EPS and revenue to increase marginally year-over-year to $1.30 and $5.47 billion in the fiscal third quarter (ending September 2023). Moreover, it surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive.

The stock has declined marginally over the past nine months to close the last trading session at $43.73.

MO’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

MO also has an A grade for Quality and a B for Growth and Stability. It is ranked #4 out of 10 stocks in the A-rated Tobacco industry. Click here to see the other ratings of MO for Value, Momentum, and Sentiment.

Japan Tobacco Inc. (JAPAY)

JAPAY is a Japan-based company mainly engaged in tobacco products, pharmaceuticals, and processed food businesses. It offers tobacco products, such as cigarettes, heat-not-burn tobacco products, E-vapor products, fine-cut tobacco products, cigars, pipes, smokeless tobacco products, and hookah and kretek products.

JAPAY’s operating costs decreased by 4.1% year-over-year to ¥738.42 billion ($5.09 billion) for the quarter that ended June 30, 2023. The company’s net operating income and attributable net income amounted to ¥9.61 billion ($66.28 billion) and ¥9.39 billion ($64.76 billion), respectively.

In addition, its total current liabilities of ¥1.64 trillion ($11.31 billion), down 11.3% compared to ¥1.85 trillion ($12.76 billion) as of March 31, 2023.

For the fiscal period ending December 31, 2023, JAPAY’s revenue is expected to improve 355.5% year-over-year to $18.56 billion. JAPAY is expected to witness revenue growth of 3.4% for the fiscal year 2024, while its EPS is estimated to increase at a rate of 5.1% over the next five years. Additionally, it topped the revenue estimates in each of the trailing four quarters.

In addition, the stock’s trailing-12-month gross profit margin and ROTA of 58.80% and 6.68% are 84.9% and 58.4% higher than the industry averages of 31.81% and 4.22%, respectively. Likewise, its trailing-12-month net income margin of 16.73% is 339% higher than the 3.81% industry average.

Over the past year, the stock has gained 23.8% to close the last trading session at $10.73.

It’s no surprise that JAPAY has an overall rating of B, which equates to a Buy in our proprietary rating system. It has an A grade for Stability and a B for Quality. Within the same industry, it is ranked #3.

In addition to the POWR Ratings we’ve stated above, we also have JAPAY’s ratings for Growth, Value, Momentum, and Sentiment. Get all JAPAY ratings here.

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.

On June 29, backed by its strong financials, the company paid its shareholders a quarterly dividend of $0.20 per share. VGR’s four-year average dividend yield is 8.01%, and its annual dividend of $0.80 translates to a 7.22% yield on prevailing prices. Also, its dividend payout has grown marginally over the past three years.

VGR’s total revenues for the six months ended June 30, 2023, increased marginally year-over-year to $699.81 million. Its EBITDA and adjusted operating income rose marginally over the prior-year period to $159.45 million and $164 million, respectively. The company’s adjusted net income increased 26.9% year-over-year to $84.79 million. In addition, its adjusted EPS came in at $0.54, representing an increase of 28.6% year-over-year.

The consensus revenue estimate of $387.50 million for the third quarter (ending September 2023) represents a 2.5% increase year-over-year. The consensus EPS estimate of $0.29 for the current quarter indicates a 20.8% improvement year-over-year. The company has an impressive surprise history, surpassing the consensus revenue and EPS estimates in three of the trailing four quarters.

VGR’s trailing-12-month net income margin of 17.18% is 351% higher than the 3.81% industry average. Likewise, its 37.43% trailing-12-month EBIT margin is 421.3% higher than the industry average of 7.18%. Furthermore, the stock’s 12.20% trailing-12-month levered FCF margin is 260.5% higher than the industry average of 3.38%.

VGR’s shares have gained 5.4% over the past nine months to close the last trading session at $11.08.

VGR’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.

It has a B grade for Value and Quality. Out of 10 stocks in the same industry, it is ranked #5. To see VGR’s rating for Growth, Momentum, Stability, and Sentiment, click here.

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MO shares rose $0.10 (+0.23%) in premarket trading Monday. Year-to-date, MO has declined -0.04%, versus a 17.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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