Though the broad market hasn’t managed to get there yet, tobacco stocks are at all-time highs right now. Maybe investors are scooping up the most defensive names they can because they’re worried about a bearish storm popping up … or perhaps investors are simply worried about a complete economic meltdown. Or, maybe cigarette makers are just darn good companies right now.
Whatever the case, one thing is certain — as is the case with any industry, not all of these companies are equally attractive opportunities. Here’s a run-down of the weakest to strongest names in tobacco out there at the moment.
Though the bottom line has been getting reliably bigger, falling short of estimated earnings in two of the last three quarters doesn’t make Lorillard (NYSE:LO) a high-odds bet for its upcoming earnings announcement. The pros are looking for a profit of $2.32 per share, compared to $2.05 for the same quarter a year earlier. Not only is that 13% profit improvement a tall order, it’s made even taller in that it would be a record per-share profit. It feels like a recipe for disappointment.
Worse, net margins have been getting steadily smaller since 2007 … not a sign of bad luck or a poor economic environment, but just a sign of the times for tobacco companies.
Side note: If the e-cigarette ever does catch on, Lorillard’s fortune could change. The recent acquisition of the Blu Cigs company makes Lorillard the frontrunner of that race. Blu Cigs only did $30 million in sales last year, but that number is getting bigger, fast.
#3: Reynolds American
While the 5.1% yield is tops for the group, Reynolds American (NYSE:RAI) also seems to be dealing with more than its fair share of cigarette-related headaches.
For starters, the 9th U.S. Circuit Appeals Court has decided the case against Reynolds American subsidiary R.J. Reynolds can resume. Ten individuals jointly sued RJR’s Camel brand for failing to redeem ‘Camel Cash’ beginning in 2006. The case had been thrown out, but it’s being brought back into the legal system. Though redeeming the Camel Cash is likely a minor liability, fighting the case can be expensive, and the publicity black-eye can do even more damage.
Additionally, though it’s true of all cigarette makers, the declining number of smokers appears to be taking a bigger-than-average toll on Reynolds American. The company has already started to shed 10% of its workforce due to the decrease in smoking. That’s rarely a good sign.
#2: Philip Morris International
Beating earnings estimates for a couple of quarters in a row is impressive. Beating estimates six quarters in a row is attention-getting. Beating estimates in eleven of the last thirteen quarters is downright investment-worthy. That’s what makes Philip Morris (NYSE:PM) so compelling right now.
Revenues have been steadily increasing for over a year, and not by chump-change increments. The top line grew by a whopping 26% in Q3 of last year, and though that was the best quarter of 2011, all of them were on par with that kind of improvement.
Simply put, Philip Morris International is a perennial winner. Though traders will have to pay something of a premium for shares — 18.0 times trailing income — that 3.4% yield and reliable growth makes it worth it.
#1: Altria Group
If bigger is better, than Altria Group (NYSE:MO) is the best banana in the bunch. Its $72 billion market cap is three times as big as the next-nearest competition, and its market share of cigarette smokers correlates with the company’s size.
Perhaps more impressive is the consistency with which Altria grows its bottom line. In every year from 2009 through 2011, every quarter’s per-share profit was higher than the year-ago comparable. And, had the company not spun off Kraft (NASDAQ:KFT) in 2007, that growth streak would go back for years. It’s amazing, just because the stumbling blocks that other cigarette makers have been dogged by (like smokers giving up the habit and expensive lawsuits judgments) just don’t seem to be an issue for Altria Group.
In other words, numbers don’t lie — Altria is doing it better than the rest. And, that forward-looking P/E of 15.1 means investors don’t have to pay a premium to get in on the action.
At the time of this writing, Jame Brumley did not hold a position in any of the aforementioned securities.