The tobacco industry’s growth prospects look promising due to consistent demand, innovative products, regulatory adaptability, diversified revenue streams, strong lobbying power, and entry into newer geographies.
Amid this backdrop, quality tobacco stocks British American Tobacco p.l.c. (BTI), Turning Point Brands, Inc. (TPB), and Vector Group Ltd. (VGR) could be wise additions to your portfolio for substantial returns. Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
Despite high taxes, stringent regulations, and health risks, global tobacco consumption has been increasing due to its addictive properties. Moreover, the tobacco industry has driven its growth by employing aggressive marketing strategies and targeting newer geographies and demographics.
The global tobacco market is predicted to grow at a CAGR of 2.5%, reaching $1.09 trillion by 2031. Moreover, tobacco companies are attempting to increase their growth by introducing new products such as snus, e-cigarettes, and nicotine pouches, which are regarded as a safer alternative to traditional tobacco.
The global e-cigarette and vape market is predicted to reach $37.70 billion by 2033, growing at a CAGR of 5.3%.
In light of these encouraging trends, let’s examine the fundamentals of the three Tobacco stock 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, heated, and modern oral, nicotine products, combustible cigarettes, and traditional oral products like snus and moist snuff.
On March 11, 2024, BTI announced the opening of a £30 million ($37.64 million) Innovation Centre for New Category Products in Southampton. This center will be essential in the company’s transformation into A Better Tomorrow. The investment aligns with BTI’s ambition to ‘Build a Smokeless World’ by generating 50% of revenue from non-combustibles by 2035.
In terms of the trailing-12-month EBITDA margin, BTI’s 48.66% is 276.1% higher than the 12.94% industry average. Likewise, its 27.11% trailing-12-month levered FCF margin is 404.1% higher than the 5.38% industry average.
BTI’s revenue for the fiscal year ended December 31, 2023, stood at £27.28 billion ($34.23 billion). Its profit from operations increased marginally year-over-year to £12.47 billion ($15.64 billion). In addition, the company’s adjusted profit attributable to shareholders came in at £8.42 billion ($10.56 billion). Also, its EPS came in at 375.60p, representing an increase of 1.1% from the previous year.
For fiscal 2025, BTI’s revenue and EPS are expected to increase 3.3% and 5.8% year-over-year to $34.94 billion and $4.99, respectively. The stock has gained 1.8% year-to-date to close the last trading session at $29.81.
BTI’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
BTI has a B grade for Stability and Sentiment. Within the B-rated Tobacco industry, it is ranked #3 out of 10 stocks. To see BTI's additional ratings for Growth, Value, Momentum, and Quality, click here.
Stock #2: Turning Point Brands, Inc. (TPB)
TPB manufactures, markets, and distributes branded consumer products. The company operates in three segments: Zig-Zag Products, Stoker’s Products, and Creative Distribution Solutions.
In terms of the trailing-12-month EBITDA margin, TPB’s 23.30% is 80.1% higher than the 12.94% industry average. Likewise, its 21.67% and 16.47% trailing-12-month EBIT margin and levered FCF margin are 137.4% and 206.2% higher than the industry averages of 9.13% and 5.38%, respectively.
During the first quarter that ended March 31, 2024, TPB posted net sales of $97.06 million, and its gross profit grew 6.8% year-over-year to $51.91 million. Its adjusted operating income increased 18.7% from the prior year’s quarter to $21.54 million. The company’s adjusted EBITDA came in at $25.27 million, up 21.6% year-over-year.
In addition, its adjusted net income and EPS of $15.42 million and $0.80 indicate growth of 29.9% and 29% year-over-year, respectively.
Street expects TPB’s revenue for the quarter ended December 31, 2024, to increase 1.6% year-over-year to $98.65 million. The company’s EPS for the quarter ending September 30, 2024, is expected to grow 1.3% year-over-year to $0.77.
It surpassed the revenue and EPS estimates in three of the trailing four quarters, which is impressive. Over the past six months, the stock has gained 55.3% to close the last trading session at $32.73.
TPB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Quality. It is ranked #2 in the same industry. Click here to see the TPB’s Growth, Value, Momentum, Stability, and Sentiment ratings.
Stock #1: Vector Group Ltd. (VGR)
VGR manufactures and sells cigarettes in the U.S. 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 brand names, as well as various partner and private label brands.
VGR’s trailing-12-month Return on Total Assets of 19.65% is 301.2% higher than the industry average of 4.90%. Likewise, the stock’s trailing-12-month levered FCF margin and EBIT margin of 17.81% and 37.10% are 231.1% and 306.3% higher than the industry averages of 5.38% and 9.13%, respectively.
For the fiscal first quarter that ended March 31, 2024, VGR’s tobacco revenues came in at $324.57 million. Its adjusted EBITDA rose 6% over the prior-year quarter to $82.75 million. The company’s adjusted net income and EPS increased 9.3% and 9.1% year-over-year to $37.22 million and $0.24, respectively.
Analysts expect VGR’s revenue for the quarter ending September 30, 2024, to increase marginally year-over-year to $365.70 million. For fiscal 2025, VGR’s EPS is expected to grow 8.6% year-over-year to $1.26. VGR’s shares have gained 4.7% intraday to close the last trading session at $9.81.
It’s no surprise that VGR has an overall B rating, equating to Buy in our POWR Ratings system.
It has a B grade for Value and Quality. It is ranked first in the Tobacco industry. Beyond what is stated above, we’ve also rated VGR for Growth, Momentum, Stability, and Sentiment. Get all VGR ratings here.
What To Do Next?
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BTI shares were trading at $29.87 per share on Monday afternoon, up $0.06 (+0.20%). Year-to-date, BTI has gained 4.45%, versus a 8.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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