Despite stringent regulations and restrictions to reduce consumption, the tobacco industry is expected to grow considerably, supported by the inelastic demand for cigarettes and other tobacco products. Hence, it seems wise to invest in quality tobacco stocks Japan Tobacco Inc. (JAPAY), Imperial Brands PLC (IMBBY), and Vector Group Ltd. (VGR), trading under $25, to capitalize on the industry’s tailwinds.
Despite strict regulations and restrictions by the government aimed at reducing tobacco consumption in various countries, the tobacco industry is expected to witness significant growth in the foreseeable future, driven by a surge in smoking rates and steady demand for tobacco products. Approximately 40 million U.S. adults smoke cigarettes.
Tobacco enjoys global acceptance, and the industry faces an inelastic demand. Furthermore, the introduction of premium tobacco products, such as flavored, long & skinny, colored, and e-cigarettes, is boosting the industry’s growth.
In addition, manufacturers are investing more in R&D to create products with lower levels of toxicants, thereby attracting a larger consumer base for tobacco products.
In 2022, the tobacco products market in the United States generated a revenue of $105.20 billion. The Statista Consumer Market Outlook estimates that the market’s revenue will continue to grow and reach approximately $110 billion by 2027.
Investors’ interest in tobacco stocks is evident from the S&P 1500 Composite Tobacco Industry Index’s 10.1% returns over the past six months.
Let’s take a closer look at the fundamentals of the featured stocks:
Japan Tobacco Inc. (JAPAY)
Headquartered in Tokyo, Japan, JAPAY produces and markets tobacco products, prescription drugs, and processed foods. Its segments include Domestic Tobacco; International Tobacco; Pharmaceutical; and Processed Food. The company also provides staple food products and seasonings, such as yeast extracts, oyster sauce, etc.
On November 18, 2022, JAPAY reported that JW Pharmaceutical Corporation, its license partner, announced the Ministry of Food and Drug Safety of the Republic of Korea’s approval of ENAROY® tablets for treating anemia in chronic kidney disease patients on hemodialysis. This approval is expected to boost JAPAY’s growth and profitability.
On October 27, JAPAY’s subsidiary Japan Tobacco International announced a joint venture with Altria Group’s (MO) PM USA to market and commercialize Ploom-branded devices and Marlboro-branded consumables for heated tobacco stick products in the U.S. market. JAPAY could benefit from access to Altria’s distribution channels.
The long-term strategic collaboration could also aid JAPAY in exploring new global opportunities in the RRP category, potentially increasing the company’s revenue and market reach.
In terms of forward EV/EBITDA, JAPAY is trading at 6.24x, which is 49.5% lower than the 12.34x industry average. Its forward EV/EBIT multiple of 8.06 is 48% lower than the 15.49x industry average.
JAPAY’s revenue increased 14.3% year-over-year to ¥2.66 trillion ($20.25 billion) for the year that ended December 31, 2022. Its adjusted operating profit rose 19.2% year-over-year to ¥727.78 billion ($5.55 billion). Also, the company’s profit for the period stood at ¥444.17 billion ($3.38 billion), a 30.6% rise from the prior year’s period, while EPS came in at ¥249.36, up 30.8% year-over-year.
The consensus revenue estimate of $20.46 billion for the fiscal year (ending December 2024) reflects a 2.4% year-over-year improvement. Likewise, the consensus EPS estimate of $0.01 for the same year indicates an 11.1% rise year-over-year. Moreover, the company surpassed its consensus revenue estimates in three of four trailing quarters.
The stock has gained 26.8% over the past six months to close the last trading session at $10.54.
JAPAY’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
JAPAY has a B grade for Value, Stability, and Quality. It is ranked #3 in the A-rated 9-stock Tobacco industry.
In addition to the POWR Ratings I’ve just highlighted, you can see JAPAY’s ratings for Growth, Sentiment, and Momentum here.
Imperial Brands PLC (IMBBY)
Based in Bristol, the United Kingdom, IMBBY produces, markets, and sells a range of tobacco products, including traditional and new-generation products such as e-vapor and heated tobacco. The company also distributes non-tobacco products and offers various services, including transportation and logistics.
On October 6, 2022, IMBBY announced a multi-year share buyback program worth £1 billion ($1.25 billion) until September 30, 2023. The program is part of IMBBY’s five-year strategy for sustainable growth and shareholder returns, supported by disciplined capital allocation and improving performance, including a strengthened balance sheet and increased investment.
In terms of forward EV/EBITDA, IMBBY is trading at 6.16x, which is 50.1% lower than the 12.24x industry average. Also, its forward EV/EBIT multiple of 6.61 is 57.3% lower than the 15.49x industry average.
For the fiscal year that ended September 30, 2022, IMBBY’s adjusted operating profit increased 3.4% year-over-year to £3.69 billion ($4.60 billion). Its adjusted earnings grew 7.5% from the prior year’s period to £2.51 billion ($3.12 billion), and its EPS stood at £2.63, a 6.9% year-over-year increase.
As of September 30, 2022, the company’s net assets stood at £12.67 billion ($15.78 billion), compared to £10.99 billion ($13.68 billion) as of September 30, 2021.
The consensus revenue estimate of $11.70 billion for the fiscal year (ending September 2023) reflects an 11.5% year-over-year improvement. Similarly, the consensus revenue estimate of $11.90 billion for the next year indicates a 1.7% rise year-over-year. Shares of IMBBY have gained 8.7% over the past year to close the last trading session at $23.36.
IMBBY’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
IMBBY has a B grade for Value and Stability. It is ranked #4 out of nine stocks within the Tobacco industry.
Click here to access additional IMBBY ratings for Quality, Growth, Sentiment, and Momentum.
Vector Group Ltd. (VGR)
VGR is a cigarette manufacturer that operates through two segments, Tobacco and Real Estate. The company sells various cigarette brands, including EAGLE 20’s, Pyramid, Montego, and Liggett Select, to wholesalers and distributors. It also invests in real estate, owning and operating apartment buildings, hotels, and commercial ventures.
VGR forward non-GAAP P/E of 10.09x is 46.7% lower than the 18.92x industry average. Likewise, its forward EV/EBITDA multiple of 7.89 is 36% lower than the 12.34x industry average. Moreover, the stock’s forward EV/EBIT multiple of 8.11 is 47.7% lower than the industry average of 15.49x.
In the fourth quarter that ended December 31, 2022, VGR’s adjusted operating income increased 11.5% year-over-year to $89.35 million. Its adjusted EBITDA from continuing operations grew 10% year-over-over to $92.71 million. The company’s adjusted net income from continuing operations rose 18.2% from the prior year’s period to $48.93 million. Its adjusted EPS was $0.31, up 19.2% year-over-year.
Analysts expect VGR’s revenue to grow 7.6% year-over-year to $1.55 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to rise 24.9% year-over-year to $1.21. Moreover, the company topped the consensus revenue estimates in all four trailing quarters, which is impressive.
The stock has gained 32.5% over the past six months to close the last trading session at $12.22.
VGR’s POWR Ratings reflect its sound prospects. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
The stock has a B grade for Growth and Quality. It is ranked #2 of the nine stocks within the same industry.
To see additional POWR Ratings for Value, Stability, Sentiment, and Momentum for VGR, click here.
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JAPAY shares were trading at $10.52 per share on Thursday afternoon, down $0.03 (-0.24%). Year-to-date, JAPAY has gained 4.89%, versus a 7.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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