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Cigarettes – If You Do Not Smoke Them, You Can Invest in Them

2018 was not an easy year for the tobacco industry to say the least. Repeated attempts made by the FDA to reduce smoking rate have caused demand for cigarettes to diminish. Indeed, the number of smokers in the United States in that year has hit a record low of 16% (in 2013, the figure stood at 20%).  If that was not enough, in June, a proposition to prohibit the sale of flavored tobacco products in San Francisco almost passed.

Tobacco companies are still facing difficulties in 2019. This June, British American Tobacco, the second largest tobacco company in the world, warned about a sharp decline in its revenues due to low demand for regular cigarettes in the United States as more and more Americans use e-cigarettes and vaping products.

Having said that, prospects for tobacco companies in the short and long term are not as bad as it was previously thought. It is predicted that by 2021 market size will reach almost $695 billion – a 2.8% CAGR from 2016.

From a yearly perspective, Philip Morris stock (NYSE:PM) has surged by 15%, almost matching the entire gains recorded by the S&P 500. In fact, the largest manufacturer of cigarettes in the world is now enjoying positive assessments from Wall Street’s top analysts.

One of  them is Bonnie Herzog from Wells Fargo. She has recently given the company’s a buy rating and a $100 price target with a 26.23% upside. Herzog is not alone in her assessment, if we weigh other analysts’ assessments, we get an average target price of $94.57 and a 19.38% Upside. Philip Morris’ current share price stands at $79.22 (June 24).

Explaining the rationale behind her buy rating, Herzog points mainly to strong cigarette price realization and the acceleration of next gen iQOS 3/Multi platforms (tobacco heating system without combustion) shipment volume in Japan (+14.5%).

Regarding the company’s iQOS, it should be mentioned that in April, Philip Morris finally received the FDA’s approval to sell this product in the U.S. domestic market after years of waiting. Up until recently, the product has been sold in the foreign markets, such as the Japanese and the Russian ones.

Another reason for optimism from Philip Morris’ point of view (and other tobacco manufacturers) was the resignation of FDA’s commissioner Scott Gottlieb in April. Gottlieb was considered a vehement anti-tobacco advocate. Tobacco companies now hope the FDA will adopt a more moderate approach towards their products. To conclude, as bright as the future may seem for tobacco manufacturers and their investors, one must not forget that there are still challenges awaiting them in years to come, especially due to the constant decline in the number of smokers in the United States and other Westerns countries. A reminder for such a challenge came in the form of an initiative in San Francisco a week ago to ban the sale of e-cigarettes.