The tobacco industry is subject to strict regulations around the world due to health hazards and the addictive and harmful nature of tobacco. However, the sector remains well poised for long-term growth due to the launch of smoke-free and other innovative products such as e-cigarettes and nicotine pouches.
Considering the industry's inelastic product demand and its capacity to innovate in response to consumer needs while adhering to regulatory standards, investing in fundamentally strong tobacco stocks Vector Group Ltd. (VGR), Universal Corporation (UVV), and British American Tobacco p.l.c. (BTI) could be wise.
Before diving deeper into their fundamentals, let’s discuss why the tobacco industry is well-positioned for growth.
Despite the health risks associated with tobacco consumption, their consumption remains steady worldwide. The industry continues to face challenges like increased taxes, stringent regulations, heightened health-related concerns, etc.
However, the addictive nature of tobacco, changing lifestyles, and rising disposable incomes are contributing to the industry’s growth. Moreover, tobacco companies are now banking on safer alternatives such as snus, e-cigarettes, and nicotine pouches to drive growth and appeal to a new customer base.
Due to increased awareness of safe and smoke-free alternatives, the global e-cigarette and vape market is set to reach $182.84 billion by 2030, growing at a CAGR of 30.6%.
Additionally, the consistent demand for tobacco ensures consistent performance through economic cycles. The global tobacco market is projected to exceed $627 million in 2024, growing at a CAGR of 3.4%. The market is further expected to expand to $878 million by 2034.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Tobacco picks, beginning with the third choice.
Stock #3: Vector Group Ltd. (VGR)
VGR manufactures and sells cigarettes. 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, as well as partner and private label brands.
In terms of the trailing-12-month net income margin, VGR’s 18.65% is 280.8% higher than the 4.90% industry average. Likewise, its 36.96% trailing-12-month EBIT margin is 338.5% higher than the industry average of 8.43%. Furthermore, the stock’s 15.26% trailing-12-month levered FCF margin is 214.1% higher than the industry average of 4.86%.
For the third quarter ended September 30, 2023, VGR’s total revenues came in at $364.11 million. Its adjusted EBITDA rose 8.8% over the prior-year quarter to $94.93 million. The company’s adjusted net income increased 38.2% year-over-year to $52 million. In addition, its adjusted EPS came in at $0.33, representing an increase of 37.5% year-over-year.
For the quarter ended December 31, 2023, VGR’s EPS is expected to increase 3.2% year-over-year to $0.32. Its revenue for fiscal 2024 is expected to increase 6.3% year-over-year to $1.51 billion. Over the past three months, the stock has gained 7% to close the last trading session at $11.35.
VGR’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value, Momentum, and Quality. Within the A-rated Tobacco industry, it is ranked #6 out of 9 stocks. In total, we rate VGR on eight different levels. Beyond what we stated above, we also have given VGR grades for Growth, Stability, and Sentiment. Get all the VGR ratings here.
Stock #2: Universal Corporation (UVV)
UVV processes and supplies leaf tobacco and plant-based ingredients worldwide. The company operates through two segments: Tobacco Operations and Ingredients Operations. It is involved in the procuring, financing, processing, packing, storing, and shipping of leaf tobacco for sale to manufacturers of consumer tobacco products.
In terms of the trailing-12-month levered FCF margin, UVV’s 9.81% is 102% higher than the 4.86% industry average. Likewise, its 0.93x trailing-12-month asset turnover ratio is 11.6% higher than the industry average of 0.84x.
UVV’s sales and other operating revenues for the fiscal second quarter that ended September 30, 2023, came in at $638.48 million. Its adjusted operating income increased 52.9% year-over-year to $57.91 million.
Also, the company’s adjusted net income attributable to UVV and adjusted earnings per share stood at $30.26 million and $1.21, up 38.5% and 37.5% over the year-ago quarter, respectively.
Over the past three months, UVV’s stock has gained 35.2% to close the last trading session at $62.76.
UVV’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value and Momentum. Within the same industry, it is ranked #5. To see UVV’s ratings for Growth, Stability, Sentiment, and Quality, click here.
Stock #1: 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, tobacco heating, modern oral nicotine products, combustible cigarettes, and traditional oral products like snus and moist snuff. The company provides its products under the Vuse, glo, Velo, Grizzly, Kodiak, Dunhill, and Kent brands.
On November 6, 2023, BTI announced a deeper strategic partnership with Organigram, a prominent Canadian cannabis producer. BTI's subsidiary plans to invest £74 million ($93.66 million) from January 2024 to January 2025, increasing its equity in Organigram from 19% to 45%. The investment targets enhanced product development collaboration, emphasizing cutting-edge R&D and innovation.
In terms of the trailing-12-month gross profit margin, BTI’s 82.66% is 145.1% higher than the 33.72% industry average. Likewise, its 48.10% EBIT margin is 470.6% higher than the 8.43% industry average. Additionally, the stock’s 11.94% trailing-12-month Return on Common Equity is 5.7% higher than the industry average of 11.30%.
BTI’s revenue for six months ended June 30, 2023, increased 4.4% year-over-year to £13.44 billion ($17.09 billion). Its profit from operations increased 61.4% year-over-year to £5.94 billion ($7.55 billion). Its net cash generated from operating activities increased 4.8% year-over-year to £3.38 billion ($4.30 billion).
The company’s profit rose 108.2% year-over-year to £4.04 billion ($5.14 billion). Also, its EPS came in at 176p, representing an increase of 117.8% year-over-year.
Street expects BTI’s EPS and revenue for fiscal 2023 to increase 3.5% and 4.5% year-over-year to $4.64 and $35.01 billion, respectively. Over the past three months, the stock has declined 0.8% to close the last trading session at $30.28.
It’s no surprise that BTI has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 in the Tobacco industry. It has a B grade for Momentum, Stability, and Sentiment. Click here to see BTI’s Growth, Value, and Quality ratings.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
VGR shares were trading at $11.42 per share on Monday afternoon, up $0.07 (+0.62%). Year-to-date, VGR has gained 1.24%, versus a -0.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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