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3 Tobacco Stocks to Watch Even Amid Industry Challenges
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Stringent regulatory norms and limitations have been hurting the cigarette volumes of several players in the Tobacco industry. Also, inflation of raw material, labor and logistic costs has been a concern. That being said, robust pricing power has been an upside.
Apart from this, the focus on reduced risk products (RRPs) or smoke-free alternatives has been working well for companies like Philip Morris International Inc. (PM - Free Report) , Turning Point Brands, Inc. (TPB - Free Report) and 22nd Century Group, Inc. (XXII - Free Report) .
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 of the companies also offer reduced-risk products such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are also engaged in making devices and attachments needed in vaping and heat-not-burn products. Most of the 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 of the international tobacco firms operate in the country through subsidiaries.
4 Trends Shaping the Future of Tobacco Industry
Stern Government Regulations: Cigarette volumes are being affected by strict government regulations pertaining to sales, marketing and manufacturing. Such regulatory norms are imposed due to the health hazards caused by the consumption of nicotine. Some of the guidelines issued by the FDA include the 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. Since cigarette sales account for the majority of revenues for companies in the tobacco industry, dwindling sales volumes in this category are a concern. On its second-quarter earnings call, Altria stated that the Biden administration introduced plans for future FDA rule-making to come up with a product standard, which would set an upper level for nicotine in cigarettes. The FDA has also proposed rules to ban menthol in cigarettes and characterizing flavors in cigars. Such headwinds, along with the rising health consciousness, have been adversely impacting cigarette sales volumes.
Cost Inflation: An overall inflationary cost scenario has been hurting the performance of many industry players. Companies are witnessing elevated inflation rates due to rising global energy, commodity and food prices, due to factors like demand-supply imbalances, labor shortage and the Ukraine war. Apart from these, hurdles in the supply and distribution channels stemming from the pandemic and the Ukraine war have been impacting the availability and cost of certain raw materials. Increased logistic costs remain a concern for a number of companies operating in the space.
High Pricing a Major Upside: Industry participants have been gaining from the solid pricing power of tobacco products, which also help them make up for high taxes and sometimes even lower cigarette sales volumes. As smokers don’t mind a price hike due to their addiction, this strategy is likely to keep working for players in the tobacco space. High pricing of cigarettes has been supporting revenues and operating income of some of the players in the tobacco industry.
Low-Risk Products Gain Prominence: Low-risk tobacco alternatives, also referred to as next-generation tobacco products, have been gaining immense popularity. Compared to cigarettes, these products are claimed to be less detrimental to health owing to their scientific composition and manner of use. Consumers are increasingly taking to such products in a bid to quit cigarettes. Tobacco biggies have been witnessing substantial revenue growth in the RRPs arena. The companies are making investments to expand in this category, such as undertaking innovations to make these products user friendly and energy efficient. The performance of tobacco players is expected to continue benefiting from RRPs. That said, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate their usage among the youth.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Tobacco industry is housed within the broader Zacks sector. The industry currently carries a Zacks Industry Rank #193, which places it in the bottom 23% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of August 2022, the industry’s earnings estimate for 2022 has declined 3.1%.
Let’s take a look at the industry’s performance and current valuation.
Industry Vs. Broader Market
The Zacks Tobacco industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 10.5% over this period compared with the broader sector’s drop of 11%. Meanwhile, the S&P 500 has declined 20.2% 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 staples stocks, the industry is currently trading at 10.34X compared with the S&P 500’s 15.47X and the sector’s 17.39X.
Over the past five years, the industry has traded as high as 18.74X, as low as 9.15X and at the median of 11.33X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
3 Tobacco Stocks to Keep a Close Eye on
Philip Morris International: This Zacks Rank #3 (Hold) company is one of the industry pioneers in driving the shift from cigarettes to RRPs. The company is committed to expanding its products to more markets. It has also been making radical progress in the respiratory drug delivery platform as part of the “Beyond Nicotine" strategy. Moreover, Philip Morris has been benefiting from its strong pricing of tobacco products.
Shares of Philip Morris have declined 15.8% in the past six months. The Zacks Consensus Estimate for PM’s 2022 earnings per share or EPS has dropped by 0.5% in the past seven days.
Turning Point Brands: This manufacturer, marketer and distributor of branded consumer products, such as alternative smoking accessories and consumables, currently carries a Zacks Rank #3. The company is gaining from its wide market presence, including its online operations. Turning Point Brands’ Zig-Zag and Stoker’s product segments have been performing well even amid an inflationary scenario, depicting inherent strength.
Turning Point Brands’ shares have dropped 35.1% in six months. The Zacks Consensus Estimate for TPB’s 2022 EPS has remained unchanged over the past 30 days.
Price and Consensus: TPB
22nd Century Group: The plant biotechnology company is focused on technologies that change the nicotine level in tobacco plants, as well as the cannabinoid level in hemp/cannabis plants. 22nd Century Group’s commitment toward its goal of lowering smoking-related damages by offering reduced nicotine tobacco cigarettes has been yielding well. Solid contract manufacturing sales have been driving this Zacks Rank #3 company.
The Zacks Consensus Estimate for 22nd Century Group’s 2022 bottom line has been stable over the past 30 days. Shares of XXII have declined 52.1% in the past six months.
Price and Consensus: XXII
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3 Tobacco Stocks to Watch Even Amid Industry Challenges
Stringent regulatory norms and limitations have been hurting the cigarette volumes of several players in the Tobacco industry. Also, inflation of raw material, labor and logistic costs has been a concern. That being said, robust pricing power has been an upside.
Apart from this, the focus on reduced risk products (RRPs) or smoke-free alternatives has been working well for companies like Philip Morris International Inc. (PM - Free Report) , Turning Point Brands, Inc. (TPB - Free Report) and 22nd Century Group, Inc. (XXII - Free Report) .
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 of the companies also offer reduced-risk products such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are also engaged in making devices and attachments needed in vaping and heat-not-burn products. Most of the 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 of the international tobacco firms operate in the country through subsidiaries.
4 Trends Shaping the Future of Tobacco Industry
Stern Government Regulations: Cigarette volumes are being affected by strict government regulations pertaining to sales, marketing and manufacturing. Such regulatory norms are imposed due to the health hazards caused by the consumption of nicotine. Some of the guidelines issued by the FDA include the 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. Since cigarette sales account for the majority of revenues for companies in the tobacco industry, dwindling sales volumes in this category are a concern. On its second-quarter earnings call, Altria stated that the Biden administration introduced plans for future FDA rule-making to come up with a product standard, which would set an upper level for nicotine in cigarettes. The FDA has also proposed rules to ban menthol in cigarettes and characterizing flavors in cigars. Such headwinds, along with the rising health consciousness, have been adversely impacting cigarette sales volumes.
Cost Inflation: An overall inflationary cost scenario has been hurting the performance of many industry players. Companies are witnessing elevated inflation rates due to rising global energy, commodity and food prices, due to factors like demand-supply imbalances, labor shortage and the Ukraine war. Apart from these, hurdles in the supply and distribution channels stemming from the pandemic and the Ukraine war have been impacting the availability and cost of certain raw materials. Increased logistic costs remain a concern for a number of companies operating in the space.
High Pricing a Major Upside: Industry participants have been gaining from the solid pricing power of tobacco products, which also help them make up for high taxes and sometimes even lower cigarette sales volumes. As smokers don’t mind a price hike due to their addiction, this strategy is likely to keep working for players in the tobacco space. High pricing of cigarettes has been supporting revenues and operating income of some of the players in the tobacco industry.
Low-Risk Products Gain Prominence: Low-risk tobacco alternatives, also referred to as next-generation tobacco products, have been gaining immense popularity. Compared to cigarettes, these products are claimed to be less detrimental to health owing to their scientific composition and manner of use. Consumers are increasingly taking to such products in a bid to quit cigarettes. Tobacco biggies have been witnessing substantial revenue growth in the RRPs arena. The companies are making investments to expand in this category, such as undertaking innovations to make these products user friendly and energy efficient. The performance of tobacco players is expected to continue benefiting from RRPs. That said, the FDA is keeping a close tab on the manufacturing and marketing policies of such items to regulate their usage among the youth.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Tobacco industry is housed within the broader Zacks sector. The industry currently carries a Zacks Industry Rank #193, which places it in the bottom 23% 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 bleak 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of August 2022, the industry’s earnings estimate for 2022 has declined 3.1%.
Let’s take a look at the industry’s performance and current valuation.
Industry Vs. Broader Market
The Zacks Tobacco industry has outperformed the Zacks S&P 500 composite as well as the broader Zacks Consumer Staples sector over the past year.
The industry has declined 10.5% over this period compared with the broader sector’s drop of 11%. Meanwhile, the S&P 500 has declined 20.2% 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 10.34X compared with the S&P 500’s 15.47X and the sector’s 17.39X.
Over the past five years, the industry has traded as high as 18.74X, as low as 9.15X and at the median of 11.33X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
.jpg)
3 Tobacco Stocks to Keep a Close Eye on
Philip Morris International: This Zacks Rank #3 (Hold) company is one of the industry pioneers in driving the shift from cigarettes to RRPs. The company is committed to expanding its products to more markets. It has also been making radical progress in the respiratory drug delivery platform as part of the “Beyond Nicotine" strategy. Moreover, Philip Morris has been benefiting from its strong pricing of tobacco products.
Shares of Philip Morris have declined 15.8% in the past six months. The Zacks Consensus Estimate for PM’s 2022 earnings per share or EPS has dropped by 0.5% in the past seven days.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: PM
Turning Point Brands: This manufacturer, marketer and distributor of branded consumer products, such as alternative smoking accessories and consumables, currently carries a Zacks Rank #3. The company is gaining from its wide market presence, including its online operations. Turning Point Brands’ Zig-Zag and Stoker’s product segments have been performing well even amid an inflationary scenario, depicting inherent strength.
Turning Point Brands’ shares have dropped 35.1% in six months. The Zacks Consensus Estimate for TPB’s 2022 EPS has remained unchanged over the past 30 days.
Price and Consensus: TPB
22nd Century Group: The plant biotechnology company is focused on technologies that change the nicotine level in tobacco plants, as well as the cannabinoid level in hemp/cannabis plants. 22nd Century Group’s commitment toward its goal of lowering smoking-related damages by offering reduced nicotine tobacco cigarettes has been yielding well. Solid contract manufacturing sales have been driving this Zacks Rank #3 company.
The Zacks Consensus Estimate for 22nd Century Group’s 2022 bottom line has been stable over the past 30 days. Shares of XXII have declined 52.1% in the past six months.
Price and Consensus: XXII