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Zacks Industry Outlook Highlights: Philip Morris, Altria Group and Turning Point Brands

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·9 min read
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  • TPB
  • MO
  • PM
  • ^GSPC

For Immediate Release

Chicago, IL – October 11, 2021 – Today, Zacks Equity Research discusses Tobacco, including Philip Morris International Inc. PM, Altria Group, Inc. MO and Turning Point Brands, Inc. TPB.

Link: https://www.zacks.com/commentary/1808116/3-tobacco-stocks-to-watch-out-for-on-rrps-and-pricing-gains

The rising popularity of low-risk tobacco alternatives has translated into a significant upside for the Zacks Tobacco industry. Products like vaping, e-cigarettes and heat-not-burn variants are being used by smokers due to their less harmful impacts on health. Companies like Philip MorrisAltria Group and Turning Point Brands have been benefiting from the growing market share of such items.

However, when it comes to cigarettes, tight regulatory norms and consumers’ growing health consciousness continue to be a downside. Nonetheless, strong pricing power has been offering respite to a number of players in the tobacco space.

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 that are 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

Low-Risk Products are Gaining Prominence: Low-risk tobacco alternatives, also referred to as next-generation tobacco products, have been gaining immense popularity. As 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 majors have been witnessing substantial revenue growth in the reduced-risk products (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. Apart from these, a few of the companies are also exploring possibilities in therapeutics and pharmaceutical drug development.

High Pricing is an Advantage: Companies in the space are likely to keep gaining from the 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.

Headwinds Related to Tobacco Sales Volumes: 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 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. Many consumers have also switched from cigarettes to other smoke-free options. Since cigarette sales account for the majority of revenues for companies in the tobacco industry, dwindling sales volumes in this category is a concern.

Pandemic-Led Adversities: Soft duty-free business stemming from reduced traveling amid the pandemic has been weighing on cigarette sales volumes of some tobacco companies. Such challenges are likely to continue unless the limitations on international traveling are waived off. Apart from this, the risk of serious lung diseases related to the virus keeps consumers somewhat cautious about smoking.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #120, which places it in the top 48% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of February 2021, the industry’s earnings estimate has improved 1.3%.

Given the industry’s encouraging prospects, we will present a few stocks that one can retain in their portfolio, given their solid business growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry vs. Broader Market

The Zacks Tobacco industry has lagged the Zacks S&P 500 composite while it has surpassed the broader Zacks Consumer Staples sector over the past year.

The industry has gained 14.9% over this period compared with the broader sector’s growth of 6.5%. Meanwhile, the S&P 500 has risen 28.4% in the said time frame.

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 10.71X compared with the S&P 500’s 20.84X and the sector’s 19.1X.

Over the past five years, the industry has traded as high as 21.24X, as low as 9.16X and at the median of 11.7X.

3 Tobacco Stocks to Keep a Close Eye On

Philip Morris International: It is one of the industry pioneers in driving the shift from cigarettes to RRPs. Markedly, the company’s IQOS is one of the leading RRPs globally. Total users of IQOS as of the end of second-quarter 2021 were estimated to be about 20.1 million.

The company is committed toward expanding these products to more markets. It has also been making radical progress in the respiratory drug delivery platform, as part of the “Beyond Nicotine" strategy announced earlier this year.

Moreover, this Zacks Rank #3 (Hold) company has long been benefiting from its strong pricing of tobacco products, which has aided revenues and adjusted operating income. Shares of this well-known tobacco products company have gained 21.3% in a year.  The Zacks Consensus Estimate for 2021 sales and earnings indicates growth of 8.7% and 17.6%, respectively.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altria Group: The company has a robust portfolio of cigarettes, RRPs and oral tobacco products. It has also undertaken efforts to expand in the cannabis industry. The marketing and technology sharing agreement between Altria and Philip Morris, pertaining to the sale of IQOS in the United States has been yielding results.

Apart from this, the company’s HeatSticks has been performing well. Moreover, this tobacco biggie, with a Zacks Rank #3, has been on track with the expansion of its oral tobacco products. The company, through its subsidiary Helix Innovations, has full global ownership of on! — a popular tobacco-derived nicotine (TDN) pouch product.

Apart from these, consistent gains from higher pricing have been supporting the company’s revenues. The stock has gained 14.3% in a year. The Zacks Consensus Estimate for 2021 sales and earnings indicates growth of 2.3% and 6%, respectively. The consensus mark for 2021 earnings has been stable over the past 30 days.

Turning Point Brands: This Kentucky-based tobacco company manufactures and markets a wide range of products under three segments namely, Zig-Zag, Stoker's and NewGen Products. The company’s Stoker's product category has been gaining from rising same store sales of MST.

The company has been investing to strengthen its NewGen segment, which has low-risk offerings such as vaping products. Solace and Nu-X are some of the well- performing brands in this category. The company has submitted Premarket Tobacco Applications to the FDA for 250 products in the vapor segment.

Shares of this Zacks Rank #3 company have surged 59.1% in a year. The Zacks Consensus Estimate for 2021 sales and earnings indicates growth of 12.8% and 6.8%, respectively. The consensus estimate for 2021 earnings has been stable over the past 30 days.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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