3 Tobacco Stocks To Add Steam To Your Portfolio

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Includes: BTI, MO, PM
by: Leonid Kanopka

The Tobacco Industry is comprised of a small set of corporations that grow, sell and distribute tobacco and related products throughout the world. Sure Tobacco gets a bad rap because of its harmful effects on the body and its deadly addictive nature. However, the blunt truth is this is a business and it is legal so why not make money. Tobacco companies are highly profitable, and in the past 5 days this industry has returned 36.45% making it the top performing industry of the week. Tobacco is in the Consumer/Non-Cyclical sector which has returned 50% in the past 12 months compared to the S&P 500. Below I have narrowed down three companies that have a bright future in not only their industry, but also in your portfolio.

Philip Morris International Inc (NYSE:PM) through its subsidiaries manufactures and sells cigarettes and other tobacco products. The current market price is $78.77 with a dividend yield of 3.92%. PM has a 5-star S&P rating and outstanding fundamental data, including a ROA of 22.62% and ROE of 178.87%. Philip Morris International Inc. reported third quarter 2011 earnings per share, excluding special items, of 1.37, surpassing the Zacks Consensus Estimate of $1.23. Currently EPS is 4.71 with a P/E of 16.74x. This EPS is slightly lower than its competitor BTI, but revenue and net income are higher. Furthermore, compared with the prior-year period, Philip Morris’ earnings per share were up 36.4% excluding currency effect, attributed by price increases and strong volume growth in Asia. Not to mention PM is a juggernaut in the industry; as the largest global tobacco company, PM ranks first or second in every region of the world, where it operates. Also, I love this company because of the successful multi-brand strategy. The company has seven of the world’s top 15 brands, including Marlboro, the number one cigarette brand worldwide. This company has a solid foundation that is here to stay for the long run; therefore I believe this is a great stock to invest in for consistent long-term gains.

British American Tobacco plc (NYSEMKT:BTI) through its subsidiaries engages in the manufacture, distribution, and sale of tobacco products. The current market price is $94.42 with a one-year analyst price target of $103.5. This represents a 10% upside potential not including its 2.5% dividend yield. The current EPS is 5.06 with a P/E of 18.63x. I like the fact that Beta is only 0.47, which makes this a safer bet than the market itself, and a 52-week return on 22.74% compared to S&P -0.66% return does not hurt the “buy” potential of this stock. The company has a market cap of 93.65B and an enterprise value of 108.42B, which shows an undervalued company. The cash from operating activities for British American Tobacco has been up for six consecutive years, and sales are up five consecutive years with no sign of a slowdown. The five-year average ROE is 33.72%, and I believe this solidifies my point of consistent growth despite a shrinking economy. This is a safe bet that pays dividends (76% payout ratio) and has shown consistent growth. The five year profit of this stock has been almost 100%, and I do not show any reason why the next five don’t offer similar profits.

Altria Group Inc (NYSE:MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States and internationally. Altria directly or indirectly owns 100% of each of Philip Morris USA, U.S. Smokeless Tobacco Company, John Middleton Co., Ste. Michelle Wine Estates, and Philip Morris Capital Corporation. In addition, Altria holds a 28.5% economic and voting interest in SABMiller plc. The current market price is $29.73 with a dividend yield of 5.5% and 93% payout ratio. PMI’s spinoff and separation from MO has enhanced growth by providing an improved focus on market dynamics, competitive frameworks, and opportunities. Also, analysts view the acquisition positively as it will provide MO with a strong presence in the MST (moist smokeless tobacco) category. Based on forward PEG, MO currently trades at a >100% premium to its Tobacco Industry peers. On average, the company has traded at a >100% premium over the past five years, which shows a consistent pattern of performance within its industry. With a beta of 0.34, a profit margin of 21.16% and a 5-Star S&P rating, MO has a deadly combination to consistently show 52-week returns of 20.81%.

The competition:

Ticker

Price

Market Cap

EPS

P/E

52-Week Return

PM

78.77

136.32B

4.71

16.65

33.77%

BTI

94.42

94B

5.03

18.85

22.75%

MO

29.73

60.90B

1.67

17.74

21.59%

RAI

41.42

24.14B

2.27

18.25

17.85%

LO

114

15.39B

7.43

15.35

34.22%

VGR

17.76

1.41B

1.01

17.53

1.78%

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PM over the next 72 hours.