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The multi-million Zacks Tobacco industry has been treading on shaky ground, thanks to stringent FDA regulations to curb cigarette consumption. Well, authorities can’t be blamed for brandishing the whip on tobacco players as smoking has become one of the primary causes of heart diseases and cancer. However, in an attempt to navigate rough waters, a few tobacco players have resorted to reduced-risk tobacco products (RRPs), a less fatal alternative to cigarettes.
Headwinds Plaguing Tobacco Majors
Cigarette sales have been deteriorating, due to several marketing regulations imposed by the FDA. Apart from seeking authorization for any new tobacco product, companies are also required to mandatorily use precautionary labels on cigarette packets. Additionally, these companies have been directed to put self-critical advertisements on television and newspapers, particularly emphasizing the addictive nature of cigarettes.
To add to the woes, the FDA is now bent on drastically reducing nicotine in cigarettes to minimally addictive levels. The initiative was proposed in 2017 but was delayed, thanks to ongoing research and opposition from several interest groups. If acted upon, lowering nicotine levels will undoubtedly be disastrous for cigarette manufacturing companies. Moreover, increasing regulatory moves have raised awareness amongst consumers regarding the detrimental effects of smoking.
The impacts of such initiatives are clearly visible on receding cigarette sales volumes of tobacco industry majors such as Altria MO, Philip Morris PM, British American Tobacco BTI and Vector Group VGR. Also, owing to these hurdles, the tobacco industry (ranked among the bottom 12% out of more than 250 Zacks industries) has dropped 6.3% in the past six months, as against the S&P 500 that gained 3.2%.
On the flip side, tobacco companies have been exploring opportunities provided by RRPs. Incidentally, Philip Morris, one of the companies leading this revolutionary shift to RRPs along with Altria, has been investing to strengthen their smoke-free products portfolio.
Let’s take a closer look at the performance of these companies and how they are placed amid the ongoing chaos as well as the efforts they have been undertaking to survive.
A Look Into Major Tobacco Players Performance
Philip Morris International Inc.’s cigarette shipment volumes declined 2.1% during the fourth quarter of 2017. This marked the company’s fourth-consecutive period of earnings and sales miss. Moreover, the company’s shares declined 9.1% over the past six months, wider than the industry’s fall.
In an effort to boost performance, Philip Morris has been radically expanding its RRPs portfolio. The company seems to stand firm on its ambitions to develop a smoke free future, evident from its recent move to completely transform one of its cigarette production facilities in Greece for the manufacture of HEETS — a unit used with iQOS. In fact, with investments close to $4.5 billion since 2008 for undertaking research and product development in the RRPs category, the company is pioneering the radical shift from harmful tobacco products to scientific and low-risk product alternatives.
Buoyed by such efforts, management expects earnings for 2018 in the range of $5.20-$5.35, depicting a growth of 34-38% over the prior-year figure. The Zacks Consensus Estimate for earning for 2018 also falls within management’s guidance and is pegged at $5.27. Moreover, this Zacks Rank #3 (Hold) company carries a VGM Score of B and has a long-term growth rate of 10.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Altria Group, Inc. saw its domestic cigarette volumes decline almost 8.9% year over year during the fourth-quarter 2017. Moreover, due to consistent declines in the cigarette category, Altria’s top line lagged the Zacks Consensus Estimate in eight out of the last 10 quarters. The company carries a VGM Score of D.
Additionally, dismal cigarette sales performance led to Altria’s shares to decline 0.7% in the past six months, which compares favorably with the industry’s fall. Well, this Zacks Rank #3 company has been managing to stay afloat on the back of its Smokeless product category. In fact, revenues in this category advanced 11.1% in the fourth quarter. Moreover, in e-vapor, Altria’s subsidiary Nu Mark LLC continues to boost MarkTen volume, which expanded 60% in 2017. Altria’s marketing and technology agreement with Philip Morris is also expected to boost the businesses of the companies. Per the agreement, Phillip Morris will market Altria’s MarkTen e-cigarettes internationally. Also, Altria will distribute two of Phillip Morris’ heated tobacco products in the United States.
Buoyed by the prospects in the smokeless category, management expects 2018 earnings to surge 5-19% year over year to $3.90-$4.03. The Zacks Consensus for 2018 earnings trended upward over the past 30 days and is pegged at $4.01. The company also has a long-term growth rate of 8.6%.
Another tobacco industry major, British American Tobacco plc, saw its shares decline almost 8.2% over the past six months. Moreover, the company’s preliminary results for 2017 depict a decline of 2.6% in organic cigarette volumes. The company carries a VGM Score of D.
Nevertheless, this Zacks Rank # 3 company has been gaining significantly from the acquisition of Reynolds American Inc. British American has also been striving to expand in the RRPs realm with its Next Generation Products lineup.
Vector Group Ltd., a Florida-based tobacco company, witnessed a decline 2.8% in tobacco unit sales volumes during the fourth quarter of 2017. The company, which has seen its shares dip 1% in the past six months, carries a VGM score of F. Although Vector Group has not ventured out into RRPs, the company relies upon the real estate segment to offset tobacco sales related hurdles.
While RRPs seem to be one of the most viable options for tobacco players to offset declining cigarette volumes, there are other factors that need to be taken care of. Advancements in the reduced risk category are yet to completely offset cigarette sales decline for most of the aforementioned companies. That said, let’s wait and watch what lies ahead for companies operating in the tobacco space and what additional efforts they can undertake to sustain in the industry.
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Altria Group, Inc. (MO) : Free Stock Analysis Report
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