Stock Analysis & Ideas

Amid Macro Woes, are These Three Tobacco Stocks Poised to Light Up?

As prices of gasoline continue their upward trajectory, it seems the tobacco companies will feel the heat. Last week, the Wall Street Journal cited data from Nielsen that the volume of cigarettes sold over a span of four weeks through March 26 dropped 9.4% year-over-year. This was a further slide from cigarette volumes in February which fell 7.9% year-over-year.

Although, what is the relation between a drop in cigarette sales and higher gasoline prices? Well, according to the report, on a historical basis, cigarette volumes in the United States have moved inversely to gasoline prices.

The report states that since cigarettes are mostly bought by people with lower incomes, and because they are frequently sold at gas station convenience stores, higher fuel prices discourage people from spending impulsively on cigarettes.

Will tobacco companies get burnt in this scenario? It doesn’t appear so. The report states that while smokers are already going in for cheaper cigarette brands, tobacco firms are going in for price hikes.

The Wall Street Journal cited data from UBS that states that the manufacturer of Lucky Strike cigarettes, British American Tobacco, and Altria, owner of the iconic Marlboro brand of cigarettes, have already raised their prices, by eight and seven times, respectively, over a span of two years.

In this scenario, using the TipRanks stock screener, we looked at some of the top tobacco stocks that are worth keeping an eye on for investors. Let us take a look.

Altria Group (NYSE: MO)

Altria has some of the most prolific cigarette brands in its business portfolio including iconic brands like Marlboro and Black & Mild. The company has also smoke-free brands under its authority including on! oral nicotine pouches and smokeless tobacco brands like Copenhagen.

The company also has equity stakes in Anheuser-Busch InBev (BUD), the brewer for famous brands like Budweiser, and Cronos Group, a Canadian cannabinoid company.

Shares of Altria have gone up 13.8% year-to-date following the company’s strong Q4 performance. While net revenues declined marginally by 0.8% year-over-year to $6.3 billion in Q4, adjusted EPS grew 10.1% to $1.09.

Management expects full-year 2022 adjusted diluted EPS to be in a range of $4.79 to $4.93, implying a growth rate of 4% to 7% compared to 2021.

Jeffries analyst Owen Bennett believes that Altria will be able to achieve earnings of $4.79 per share in FY22 with an implied growth of 4%. When it comes to MO’s Q1, the analyst expects that macro headwinds will continue for the stock with cigarette volumes likely to decline by 10.2% year-over-year and sales likely to fall by 4.2%.

However, while the analyst admitted that its combustible portfolio is likely to be under pressure, it is Altria’s reduced-risk products (RRP) portfolio that becomes more important. The analyst was specifically referring to Juul, an e-vaping brand. In which Altria has a 35% stake.

In February this year, VapingPost reported that anti-vaping politicians and groups have been putting the U.S. Food and Drug Administration (FDA) under pressure “to flat out reject any PMTA [premarket tobacco product applications] by Juul.”

Bennett thinks that considering MO’s “challenged RRP positioning currently, our bullishness on the name is based on a view that it should and could buy Juul — which we believe would be a source of material upside.”

As a result, the analyst is bullish on the stock with a Buy rating and a Street-high price target of $57, implying an upside potential of 4.4% to early morning trading levels on Tuesday.

Other Wall Street analysts, however, are cautiously optimistic about the stock with a Moderate Buy consensus rating based on two Buys and four Holds. The average Altria stock forecast is $53.50, with a downside potential of 2%, implying that the stock has already overshot its valuation.

Philip Morris International (NYSE: PM)

Philip Morris International was spun-off from Altria as a publicly-traded company in 2008. The company’s business portfolio consists of cigarettes and smoke-free products, including vapor, oral and nicotine products, and heat-not-burn products.

The company posted strong results in FY21 with adjusted revenues up 7.6% year-over-year on an organic basis. PM’s heated tobacco products developed under the brand IQOS did exceedingly well in FY21 despite device supply constraints with 21.2 million estimated users. IQOS had RRP organic net revenue growth of 31% in 2021 while smoke-free products made up around 30% of PMI’s total revenues of $8.1 billion in Q4.

Late last month, the company announced plans to suspend its investments and “scale down its manufacturing operations in Russia.” The company has already reduced its manufacturing activities and has discontinued its cigarette products in the Russian market.

PMI has also canceled all its product launches for 2022 in Russia and plans to exit the Russian market eventually. Russia comprised around 10% of the company’s total shipment volumes and approximately 6% of PMI’s net revenues in 2021.

Following this announcement, Bank of America analyst Lisa Lewandowski while maintaining a Buy rating on the stock, lowered the price target from $120 to $107, just above the lowest price target of $100 on the Street.

The analyst also reduced the earnings estimates for the stock by 6% for both FY22 and FY23 to $6.27 per share and $7.01 per share, respectively.

Wall Street analysts, however, do not side with Lewandowski but are cautiously optimistic about the stock with a Moderate Buy consensus rating based on five Buys and three Holds. The average PM stock forecast is $107.88, with an upside potential of 6.8% to early morning trading levels on Tuesday.

Imperial Brands (UK: IMB)

Imperial Brands is a tobacco company based out of Bristol, UK. While the company’s core business portfolio revolves around cigarettes and other tobacco products, IMB is also building a next-generation products (NGP) business that includes vapor, heated tobacco, and oral nicotine products.

By 2025, the company expects NGP will make up 20% “of the total nicotine market.”

It is this NGP market that J.P. Morgan analyst Jared Dinges is bullish about. For the analyst, vapor or e-cigarettes “is a key pillar of the global nicotine industry’s future,” and believes that the revenue and profit opportunity in Vapor is “is greater than previously assumed and will take on greater investor focus with Heated Tobacco (HTP) expected to take a step back near term.”

As a result, for the analyst, while British American Tobacco (UK: BATS) is his preferred name over the medium to long-term in the tobacco business Imperial Brands remains “our top pick near-term.”

Dinges sees several positives for the stock including a potential share buyback announcement, and robust free cash flows. The analyst has forecasted IMB’s earnings per share (EPS) to grow at a Compounded Annual Growth Rate (CAGR) in double-digit over the medium term versus its other tobacco peers.

Dinges expects this growth to be “driven by more targeted NGP investment and continued tobacco margin expansion, along with a sizeable boost of share buybacks.” The analyst is optimistic about the stock with a Buy rating and a price target of £2,000p, implying an upside potential of 6.8% to early morning trading levels on Tuesday.

The rest of the analysts are cautiously optimistic about the stock with a Moderate Buy consensus rating based on five Buys and two Holds. The average IMB stock forecast is £1,988.33p, with an upside potential of 19.1% to early morning trading levels on Tuesday.

Bottom Line

It is interesting to note here that even amid a widespread stock sell-off in U.S. stock markets, tobacco companies have still fared surprisingly well. Year-to-date, tobacco stocks including British American Tobacco, Altria, and Philip Morris International have seen their stock prices go up by 12.5%, 13.8%, and 5.6%, respectively while Imperial Tobacco has seen its stock price drop only by 0.9%.

Considering that Wall Street analysts are also upbeat about these stocks, they certainly seem to be worth a look for investors.

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