Despite stringent government regulations and the harmful health effects of tobacco use, the tobacco industry appears to be thriving with the introduction of tobacco-free and other innovative products such as e-cigarettes and nicotine pouches. Also, growing chain smokers and tobacco consumers contribute to the sustained adoption of tobacco products.

Given the industry tailwinds, it could be wise to invest in fundamentally sound tobacco stocks Japan Tobacco Inc. (JAPAY), Turning Point Brands, Inc. (TPB), and Imperial Brands PLC (IMBBY) this month for solid returns this month.

The tobacco industry has grown considerably despite the health risks associated with tobacco consumption from cancer and heart disease to lung disease and chronic obstructive pulmonary disease (COPD). The industry has even evidenced continued challenges such as surging taxes, strict rules and regulations, etc.

Tobacco companies highly benefit from the addictive nature of tobacco, compelling the consumer in the direction of consistent consumption. That leads to positive performance even through economic cycles. An estimated 28.3 million US adults are cigarette smokers, and nearly 2.80 million US middle and high school students use at least one tobacco product.

The global tobacco market is expected to exceed a valuation of $627 million in 2024, growing at a CAGR of 3.4% during the forecast period. The market is projected to reach $878 million by 2034.

In recent years, the slightly safer and less harmful tobacco products have taken over the industry significantly. Large corporations are shifting toward safer alternatives such as snus, e-cigarettes, heated tobacco products (HTPs), and nicotine pouches, boosting the industry’s growth and observing an expanding customer base.

Moreover, a surge in advertising and promotion of smokeless tobacco attracts consumers and increases the sales of cigars and electronic pipes. The global e-cigarette and vape market is expected to reach $182.84 billion by 2030, exhibiting a CAGR of 30.6%.

With these encouraging trends in mind, let’s delve into the fundamentals of the three Tobacco stock picks, beginning with the third choice.

Stock #3: Japan Tobacco Inc. (JAPAY)

Headquartered in Tokyo, Japan, JAPAY manufactures and sells tobacco products, pharmaceuticals, and processed foods internationally. The company operates through three segments: Tobacco Business; Pharmaceutical; and Processed Food.

On October 31, 2023, JAPAY announced the launch of Ploom X ADVANCED, its newest heated tobacco device in Japan, to be sold at convenience and tobacco stores nationally. This new device will deliver enhanced taste satisfaction as compared to the old Ploom X model. This new launch might extend the company’s market reach and drive its growth.

JAPAY’s trailing-12-month gross profit and EBITDA margins of 58.53% and 30.89% are significantly higher than the respective industry averages of 33.72% and 11.26%. Likewise, the stock’s trailing-12-month net income margin of 17.14% is 250% higher than the industry average of 4.90%.

During the third quarter that ended September 30, 2023, JAPAY’s revenue increased 3% year-over-year to ¥764.20 billion ($5.20 billion). Its operating profit came in at ¥218.30 billion ($1.51 billion), up 11.2% year-over-year. Also, its profit grew 11% from the year-ago value to ¥155 billion ($1.06 billion).

In addition, the company’s total assets stood at ¥7.10 trillion ($49.21 billion) as of September 30, 2023, compared to of ¥6.54 trillion ($45.37 billion) as of December 31, 2022.

Street expects JAPAY’s revenue and EPS for the fiscal year (ending December 2024) to increase 4.4% and 11.1% year-over-year to $20.16 billion and $0.01. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters.

Over the past six months, JAPAY’s stock has surged 21.6% and 32.4% over the past year to close the last trading session at $13.08.

JAPAY’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

JAPAY has an A grade for Stability and a B for Momentum and Quality. It is ranked #3 out of 9 stocks in the Tobacco industry.

In addition to the POWR Ratings we’ve stated above, we also have JAPAY’s ratings for Sentiment, Growth, and Value. Get all JAPAY ratings here.

Stock #2: Turning Point Brands, Inc. (TPB)

TPB manufactures, markets, and sells adult consumer products. The company operates through Zig-Zag Products; Stoker’s Products; and NewGen Products segments. It markets and distributes rolling papers, tubes, finished cigars, make-your-own cigar wraps, moist snuff tobacco and loose-leaf chewing tobacco products.

On December 8, TPB declared a regular quarterly dividend of $0.065 per common share. The dividend was paid on January 5, 2024, to shareholders of record on the close of business on December 15, 2023. TPB’s annual dividend of $0.26  translates to a yield of 1.01% at the current share price. Its four-year average dividend yield is 0.79%.

Moreover, the company’s dividend payouts have grown at a CAGR of 9.5% over the past five years. TPB has raised its dividends for six consecutive years.

TPB’s trailing-12-month gross profit and EBIT margins of 49.14% and 19.26% are 45.7% and 128.5% higher than the industry averages of 33.72% and 8.43%, respectively. In addition, the stock’s trailing-12-month levered FCF margin of 10.82% is 122.7% higher than the industry average of 4.86%.

For the third quarter of 2023, which ended September 30, TPB reported net sales of $101.72 million. The company’s operating income came in at $20.24 million, an increase of 2.1% year-over-year. Its adjusted net income and adjusted EPS rose 1.6% and 5.6% year-over-year to $14.52 million and $0.76, respectively.

The company updated its full-year 2023 guidance. The company expects its adjusted EBITDA to be $92 to $95 million for the full year, which was earlier forecasted between $90 to $95 million.

Analysts expect TPB’s EPS for the fiscal year (ending December 2024) to increase marginally year-over-year to $2.79. Further, the company’s EPS is expected to grow 5.7% per annum over the next five years.

Shares of TPB have gained 11% over the past six months and 22.6% over the past year to close the last trading session at $26.33.

TPB’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

The stock has a B grade for Momentum. Within the Tobacco industry, TPB is ranked #2 of 9 stocks.

Click here to access additional ratings of TPB for Growth, Value, Quality, Sentiment, and Stability.

Stock #1: Imperial Brands PLC (IMBBY)

Based in Bristol, the United Kingdom, IMBBY manufactures, imports, markets, and sells tobacco and tobacco-related products. It provides a wide range of cigarettes, tobacco accessories, heated tobacco, and oral nicotine. The company sells its products under JPS, Davidoff, West, Winston, Kool, Lambert & Butler, Golden Virginia, Rizla, Skruf, and Zone X brands.

In June 2023, IMBBY acquired a nicotine pouches range from TJP Labs, a Canada-based manufacturer, to facilitate its entry into the US modern oral market. The transaction will allow ITG Brands, Imperial’s US operation, to offer legal adult consumers in the US a diverse range of 14 product variants in a pouch that performs strongly in consumer testing.

After further consumer testing, ITG Brands will relaunch the range this year under a new brand, which will be supported by the company’s existing US sales force. This strategic acquisition provides IMBBY an opportunity to expand its next-gen product offerings in the US.

IMBBY pays an annual dividend of $1.80, which translates to a yield of 7.54% at the current share price. The company’s four-year average dividend yield is 9.34%.

IMBBY’s trailing-12-month gross profit and EBIT margins of 36.95% and 17.93% favorably compared to the respective industry averages of 33.72% and 8.43%.Also, the stock’s trailing-12-month net income margin of 12.88% is 163% higher than the industry average of 4.90%.

For the fiscal year that ended September 30, 2023, IMBBY reported a revenue of £32.48 billion ($41.09 billion). Its gross profit grew 10.6% year-over-year to £6.68 billion ($8.45 billion). Its operating profit was £3.40 billion ($4.33 billion), up 26.8% from the prior year’s period. The company’s adjusted EBITDA rose 5.6% year-over-year to £4.16 billion ($5.26 billion).

Furthermore, profit for the year and adjusted earnings per share came in at £2.33 billion ($2.95 billion) and 278.80 pence, up 48.3% and 5.1% from the year-ago values, respectively.

Analysts expect IMBBY’s revenue and EPS for the fiscal year (ending September 2024) to increase 3% and 10.06% year-over-year to $12.20 billion and $3.11, respectively.

IMBBY’s stock has surged 4.2% over the past month and 6.8% over the past six months to close the last trading session at $24.15.

IMBBY’s POWR Ratings reflect its bright prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

IMBBY has an A grade for Stability and a B for Value and Momentum. It is ranked first among nine stocks in the Tobacco industry.

To access IMMBY’s ratings (Sentiment, Growth, and Quality), click here.

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JAPAY shares were unchanged in premarket trading Tuesday. Year-to-date, JAPAY has gained 1.63%, versus a -0.15% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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