Despite strict regulations worldwide due to health concerns, the tobacco industry is expected to remain resilient thanks to steady demand and the launch of smoke-free and other innovative products like e-cigarettes, nicotine pouches, and vape goods. Moreover, the decline in inflation is also expected to boost demand for various tobacco products.
Considering these factors, investors could consider buying fundamentally strong tobacco stocks: British American Tobacco p.l.c. (BTI), Vector Group Ltd. (VGR), and Imperial Brands PLC (IMBBY).
Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
The tobacco industry faces challenges such as high taxes, declining smoking rates, and strict regulations on consumption and sale. However, demand continues to grow due to tobacco's addictive nature, shifting lifestyles, and increasing disposable incomes.
The industry is witnessing a trend of new product launches, which has intrigued consumers and helped drive market growth through increased tobacco consumption. Tobacco companies are now banking on safer alternatives like snus, e-cigarettes, and nicotine pouches, called Next Generation Products (NGPs), to drive growth and attract a new customer base.
As people of all ages have become more concerned about traditional cigarettes, the demand for significantly less hazardous e-cigarettes and vape products has increased, aiding the industry's expansion. Due to the increased awareness of safe and smoke-free options, the global e-cigarette and vape market is set to reach $182.84 billion by 2030, growing at a CAGR of 30.6%.
Additionally, tobacco's steady demand ensures stable performance across different economic cycles, making it a solid investment option. The global tobacco market is projected to exceed $627 million in 2024 and grow at a CAGR of 3.4% to reach $878 million by 2034.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Tobacco picks, beginning with the third choice.
Stock #3: 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 March 11, 2024, BTI announced the opening of a £30 million ($38.18 million) Innovation Centre for New Category products in Southampton, playing a crucial role in BTI’s transformation towards A Better Tomorrow. The investment supports BTI’s vision to 'Build a Smokeless World' with 50% of revenue from Non-Combustibles by 2035.
On January 10, 2024, BTI announced the launch of glo Hyper Pro, its most innovative glo device yet, featuring HeatBoost technology for enhanced taste satisfaction and an EasyView screen displaying performance settings. This new device is part of BTI's efforts to reduce the health impact of smoking by providing satisfying, reduced-risk alternatives for adult smokers globally.
In terms of the trailing-12-month EBITDA margin, BTI’s 48.66% is 314% higher than the 11.75% industry average. Likewise, its 46.33% EBIT margin is 433.2% higher than the 8.69% industry average. Additionally, the stock’s 7.45% trailing-12-month Return on Total Capital is 12.4% higher than the industry average of 6.63%.
BTI’s revenue for the fiscal year ended December 31, 2023, increased 1.3% year-over-year to £27.28 billion ($34.72 billion). Its profit from operations increased marginally year-over-year to £12.47 billion ($15.87 billion). The company’s adjusted profit attributable to shareholders came in at £8.40 billion ($10.69 billion). Also, its EPS came in at 375.60p, representing an increase of 1.1% year-over-year.
For fiscal 2024, BTI’s revenue is expected to increase marginally year-over-year to $34.53 billion. Its EPS for fiscal 2025 is expected to increase 5.8% year-over-year to $4.99. BTI’s stock has gained 3.2% year-to-date to close the last trading session at $30.24.
BTI’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 Stability and Sentiment. Within the A-rated Tobacco industry, it is ranked #4 out of 9 stocks. In total, we rate BTI on eight different levels. Beyond what we stated above, we also have given BTI grades for Growth, Value, Momentum, and Quality. Get all the BTI ratings here.
Stock #2: 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 19.57% is 285.6% higher than the 5.07% industry average. Likewise, its 36.83% trailing-12-month EBIT margin is 323.9% higher than the industry average of 8.69%. Furthermore, the stock’s 17.81% trailing-12-month levered FCF margin is 245.3% higher than the industry average of 5.16%.
For the fourth quarter ended December 31, 2023, VGR’s total revenues came in at $360.35 million. Its adjusted EBITDA rose 5.4% over the prior-year quarter to $99.63 million. The company’s adjusted net income increased 17.5% year-over-year to $57.50 million. In addition, its adjusted EPS came in at $0.36, representing an increase of 16.1% year-over-year.
Analysts expect VGR’s EPS for the quarter ending March 31, 2024, to increase 13.6% year-over-year to $0.25. Its revenue for the quarter ending June 30, 2024, is expected to increase 4% year-over-year to $380.10 million. Over the past six months, the stock has gained 1.2% to close the last trading session at $10.90.
It’s no surprise that VGR has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #2 in the same industry. It has a B grade for Value, Sentiment, and Quality. Click here to see VGR’s Growth, Momentum, and Stability ratings.
Stock #1: Imperial Brands PLC (IMBBY)
Based in Bristol, United Kingdom, IMBBY and its subsidiaries manufacture, import, market, and sell tobacco and tobacco-related products in Europe, the Americas, Africa, Asia, and Australasia. It offers a range of cigarettes, tobacco accessories, vapor products, heated tobacco, and oral nicotine.
In terms of the trailing-12-month gross profit margin, IMBBY’s 36.95% is 8.3% higher than the 34.14% industry average. Likewise, its 7.89% trailing-12-month Return on Total Assets is 54.5% higher than the industry average of 5.11%. Furthermore, the stock’s 11.94% trailing-12-month levered FCF margin is 131.5% higher than the industry average of 5.16%.
IMBBY’s revenues for the fiscal year ended September 30, 2023, came in at £32.48 billion ($41.33 billion). The company’s operating profit rose 26.8% year-over-year to £3.40 billion ($4.33 billion), and its profit for the year increased 47.5% over the prior-year quarter to £2.46 billion ($3.13 billion). Moreover, its EPS grew 52.3% year-over-year to 250.80p.
Street expects IMBBY’s EPS and revenue for fiscal 2024 to increase 21.5% and 2% year-over-year to $3.42 and $12.08 billion, respectively. Over the past six months, the stock has gained 1.5% to close the last trading session at $22.26.
IMBBY’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 an A grade for Value and Stability and a B for Growth. Within the Tobacco industry, it is ranked first. To see IMBBY’s Momentum, Sentiment, and Quality ratings, click here.
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BTI shares rose $0.02 (+0.07%) in premarket trading Thursday. Year-to-date, BTI has gained 3.38%, versus a 10.37% 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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