Consumer staples have been witnessing a steady rise in demand and prices since the beginning of the COVID-19 pandemic last year, due in-part to panic shopping. The demand for tobacco products, which was declining typically by 3-4% annually in the United States, has also risen over the past year. The industry saw increasing numbers of smokers worldwide last year, likely due in some measure by stress introduced by remote lifestyles. However, rising concerns regarding health worldwide have incentivized most tobacco companies to research and produce the next-generation smokeless products, which are expected to carry lower health risks.
Philip Morris International, Inc. (PM), the producer top cigarette brand Marlboro, introduced heat-not-burn (HNB) tobacco products last year. PM has even partnered with Altria Group, Inc. (MO) to make HNB products. However, the U.S. Food and Drug Association (FDA) has not granted approval to replace HNBs with regular cigarettes. So, we think it would be best to avoid PM for now.
As an alternative, we think investors should focus on companies that have viable product pipelines, such as British American Tobacco PLC (BTI) and Vector Group Ltd. (VGR). These stocks have the potential to perform better than PM in the near term.
British American Tobacco PLC (BTI)
Founded in 1902, BTI is a multi-category consumer goods company that delivers tobacco and nicotine products. The company operates through five segments—U.S., Americas and Sub-Saharan Africa, Europe and North Africa, and Asia-Pacific and Middle East. The company manufactures and sells cigarettes, roll-your-own tobacco, cigars, e-cigarettes, medicinal nicotine products and tobacco heating products. It sells its products to retail outlets.
On March 11, BTI entered a strategic collaboration with Organigram Inc. (OGI) to focus on the research and product development activities of next generation adult cannabis products. BTI has also invested £126 million in OGI in return for a 19.9% equity stake.
For the year ended December 31, 2020, the company’s revenue from its U.S. segment has increased 10.6% year-over-year to $11.47 billion. Its adjusted profit from operations was £11.37, up 4.8% year-over-year. Its adjusted net profit came in at £7.61 billion, which represents an increase of 2.6% year-over-year. And its adjusted EPS increased 2.4% to 331.7p. The company had assets of £137.69 billion as of December 31, 2020.
For the fiscal year ending December 2022, analysts expect the BTI’s EPS to improve 6.1% year-over-year to $4.77. Also, a consensus revenue of $36.21 billion is estimated for the same period, representing a 3.6% year-over-year improvement. Analysts expect the stock’s EPS to grow 4.5% per annum over the next five years. The stock has gained 6.2% over the past year and closed yesterday’s trading session at $38.65.
BTI’s strong fundamentals are reflected in its POWR Ratings. The stock has a B overall rating, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Stability, and a B grade for Sentiment and Momentum. We have also graded BTI for Value, Quality, and Growth. Click here to access all BTI’s ratings.
BTI is ranked #3 of 11 stocks in the A-rated Tobacco industry.
Vector Group Ltd. (VGR)
Based in Miami, Florida, VGR manufactures and sells cigarettes in the United States. The company operates through three segments—Tobacco, E-Cigarettes and Real Estate. It sells cigarettes through its Liggett Group LLC and Vector Tobacco Inc. subsidiaries. Its real estate business is administered through its New Valley LLC subsidiary. It markets and sells its cigarettes to wholesalers and distributors of tobacco and convenience products, as well as grocery, drug, and convenience store chains.
On March 1, VGR launched New Valley Ventures to develop next-generation technologies in the property technology space. New Valley Ventures has acquired an ownership stake in Rechat, a lead-to-close fully mobile technology dashboard for real estate agents. VGR’s Board of Directors has declared a regular quarterly cash dividend of $0.20 per share on its common stock. In January, VGR priced $875 million of 5.75% senior secured notes.
VGR’s total revenue was $554.59 million for the fourth quarter, ended December 31, 2020, which represents an improvement of 26.2% year-over-year. Its gross profit was $177.53 million, up 29% year-over-year. The company’s income from operations increased 91.6% year-over-year to $87.33 million. Its adjusted net income was $32.56 million, up 82.4% year-over-year. Also, the company’s adjusted EPS increased 90.9% year-over-year to $0.21.
A consensus EPS estimate of $0.22 for the next quarter, ending June 30, 2021, represents a 29.4% rise year-over-year. VGR surpassed the Street’s consensus EPS estimates in three the trailing four quarters. Also, its consensus revenue estimate of $559.30 million for the next quarter represents a 5.6% rise from the prior-year period. Analysts expect the stock’s EPS to grow 6.4% per annum over the next five years. The stock has rallied 52.6% over the past year to close yesterday’s trading session at $14.04.
It’s no surprise that VGR has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock also has an A grade for Growth, and a B grade for Value, Momentum, Stability, and Quality. Click here to see VGR’s additional POWR Ratings for Sentiment.
VGR is ranked #1 in the same industry.
The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
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BTI shares were trading at $39.77 per share on Thursday afternoon, up $1.12 (+2.90%). Year-to-date, BTI has gained 8.11%, versus a 9.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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