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The tobacco sector will see the reporting season begin next week with Philip Morris International (New York Stock Exchange: PM) that will enter the earnings confessional on October 19. Tobacco stocks underperformed the S&P 500 index during the third quarter as the upcoming heated tobacco flavor The ban in Europe, the relentless strength of the US dollar, high interest rates and the general cooling of sentiment on consumer staples stocks weighed on sentiment. If there was one bright spot during the quarter, it was the strong 2024-2-2026 guidance revealed by Philip Morris International (P.M) within the framework of the company’s Investor Day in Switzerland.
Following the Philip Morris (PM) event, Morgan Stanley reiterated its Overweight rating on PM and called it the company’s top overall pick among U.S. food and tobacco stocks. Analyst Pamela Kaufman said the new PM’s medium-term goals reinforced multiple tenets of BofA’s bullish view, including significant additional growth opportunity for IQOS in new and existing markets, expansion of smoke-free products, strong Zyn momentum with room to triple sales of the brand in the US and expand internationally, significant growth potential for IQOS in the US market from 2024 with compelling unit economics and confidence in PM’s advantageous financial prospects and higher mid-term targets term of 6% to 8% organic revenue growth and 8% to 10% organic OCI growth. and EPS growth of 9% to 11% at constant exchange rates underline its confidence. “We believe PM is uniquely positioned within the consumer staples sector given its broad geographic diversification, strong pricing power, leading market share and more than $10.7 billion in investment in R&D and brand building over the past 15 years to transform their business,” Kaufman said.
The view from Wall Street is more lukewarm on Altria (New York Stock Exchange: MO) as analysts have a consensus rating of Hold. Bank of America said weak cigarette volumes and declining trading are a drag on the company in the near term. Reporting for the third quarter, the company is watching for signs of progress on its smoke-free vision, success in balancing volumes and profits, lingering pressures from the FDA and consumers tired of inflation. “We believe that general consumer goods inflation may affect premium fuel volumes in the short term,” warned analyst Lisa Lewandowski. “In addition, investors expect additional comments from the FDA on reducing nicotine levels and banning menthol in cigarettes,” she added.
Investors may hear some tobacco companies comment on this quarter’s round of earnings conference calls about proposed legislation in the United Kingdom to prevent children 14 and younger from being legally sold cigarettes this year in England. during all his life. Bank of America believes the impact of the UK’s potential cigarette ban will be slow and prolonged before directly affecting corporate profits. Imperial Brands (OTCQX:IMBBY) was seen as most exposed to the development, with British American Tobacco plc (New York Stock Exchange: BTI) and Philip Morris (PM), potentially benefiting from a faster acceleration towards NGPs. Imperial Brands has the largest market share in UK cigarettes with a 45% volume share according to Euromonitor, with BAT (8%) and Philip Morris (7%) having a substantially smaller share. The UK market represents ~7% of Imperial Brands’ revenue and a larger proportion of adjusted EBIT. Meanwhile, UK cigarette revenues are irrelevant to BAT and Philip Morris’s overall revenues. The potential ban story has caused stock price declines. Since media reports first appeared, Imperial and BAT’s respective share prices have declined ~9%, and Philip Morris has declined ~4% over the same period, although BofA noted that the moves are not necessarily entirely attributable to the proposal.
So far this year, major tobacco stocks are lagging the S&P 500 index.
Imperial Brands (OTCQX:IMBBY) is the tobacco stock with the highest Alpha Quant Search Rating, while British American Tobacco (BTI) has the highest dividend yield for new buyers. Seeking Alpha analyst Dan Victor has a Buy rating on Vector Group (VGR) as a tobacco sleeping option due to its attractive valuation and lower exposure to menthol cigarettes.