Despite being subjected to stringent ESG standards and government regulations, tobacco stocks have been significant wealth creators for investors. The status of tobacco products as essential items helps them witness a steady demand irrespective of economic cycles. Moreover, launching innovative products to meet changing consumer preferences should help tobacco companies grow their revenues.

Given this backdrop, buying tobacco stocks Vector Group Ltd. (VGR), Turning Point Brands, Inc. (TPB), and British American Tobacco p.l.c (BTI) could be wise, given their steady profits.

Before diving deeper into the fundamentals of these stocks, let’s take a closer look at why the tobacco industry is poised for sustainable growth.

The tobacco industry faces several challenges, including stringent ESG standards, declining smoking rates, high taxes and health-related concerns. Despite efforts to reduce smoking rates and improve public health, an estimated 28.3 million adults in the United States smoke cigarettes.

Although smoking rates have declined in some countries, they are rising in developing nations. Tobacco companies are fighting the challenges of increased health awareness and declining smoking rates by introducing less-risky alternatives such as e-cigarettes, heated tobacco products (HTPs), snus, and nicotine pouches. Tobacco companies refer to these products as ‘next generation products (NGPs).’

The global e-cigarette market is projected to generate a revenue of $24.60 billion this year. It is expected to grow at a CAGR of 3.6% during the 2023 to 2028 period. The tobacco market is projected to grow at a CAGR of 3.8% to reach $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 various partner and private label brands.

In terms of the trailing-12-month net income margin, VGR’s 17.18% is 300% higher than the 4.30% industry average. Likewise, its 37.43% trailing-12-month EBIT margin is 368% higher than the industry average of 8%. Furthermore, the stock’s 12.20% trailing-12-month levered FCF margin is 255.4% higher than the industry average of 3.43%.

For the second quarter ended June 30, 2023, VGR’s total revenues came in at $365.66 million. Its adjusted EBITDA came in at $94.12 million. The company’s adjusted net income increased 26.2% year-over-year to $50.76 million. In addition, its adjusted EPS came in at $0.32, representing an increase of 28% year-over-year.

For the quarter ended September 30, 2023, VGR’s EPS and revenue are expected to increase 34.6% and 2.5% year-over-year to $0.32 and $387.50 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 15.5% to close the last trading session at $10.97.

It’s no surprise that VGR 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 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, Value, Momentum, Stability, and Sentiment. Get all the VGR ratings here.

Stock #2: 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.

In terms of the trailing-12-month EBITDA margin, TPB’s 20.15% is 75.7% higher than the 11.47% industry average. Likewise, its 18.78% trailing-12-month EBIT margin is 134.8% higher than the industry average of 8%. Furthermore, the stock’s 9.71% trailing-12-month levered FCF margin is 182.9% higher than the industry average of 3.43%.

TPB’s net sales for the second quarter ended June 30, 2023, rose 2.6% year-over-year to $105.60 million. Its adjusted operating income came in at $21.43 million. The company’s adjusted net income increased 8.4% year-over-year to $15.30 million.

Its adjusted EPS came in at $0.79, representing an increase of 12.9% year-over-year. In addition, its adjusted EBITDA rose 2.2% year-over-year to $25.28 million.

Analysts expect TPB’s revenue for the quarter ending March 31, 2024, to increase 1% year-over-year to $102 million. Over the past year, the stock has gained 8% to close the last trading session at $22.43.

TPB’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 Quality. It is ranked #2 in the same industry. To see TPB’s ratings for Growth, Value, Momentum, Stability, and Sentiment, click here.

Stock #1: 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, Kent, Lucky Strike, Pall Mall, Rothmans, Camel, Natural American Spirit, Vogue, etc., brands.

In terms of the trailing-12-month gross profit margin, BTI’s 82.66% is 150.8% higher than the 32.96% industry average. Likewise, its 48.10% EBIT margin is 501.3% higher than the 8% 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 ($16.35 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.23 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.11 billion).

The company’s profit for the period rose 108.2% year-over-year to £4.04 billion ($4.92 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 fiscal 2023 to increase 0.7% and 1.6% year-over-year to $4.51 and $34.03 billion, respectively. Over the past three months, the stock has declined 8.4% to close the last trading session at $30.30.

BTI’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked first in the Tobacco industry. It has a B grade for Stability, Sentiment, and Quality. Click here to see BTI’s Growth, Value, and Momentum ratings.

What To Do Next?

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BTI shares were trading at $30.22 per share on Thursday morning, down $0.08 (-0.26%). Year-to-date, BTI has declined -19.55%, versus a 13.81% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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