3 Tobacco Stocks to Watch as Smoke-Free Trends Ignite Growth

The Zacks Tobacco industry players are increasingly pivoting toward smoke-free alternatives, driven by consumer health awareness and tightening regulations against traditional cigarettes. Companies like Philip Morris International Inc. PM, Altria Group, Inc. MO and British American Tobacco p.l.c. BTI are investing significantly in reduced-risk products (RRPs), positioning them for growth in this transforming market.

Despite declining cigarette sales volumes due to inflation and changing consumer preferences, the industry benefits from robust pricing power, as smokers are typically less sensitive to price increases. This strategic shift toward RRPs, alongside resilient pricing, supports a more adaptable and sustainable industry outlook amid evolving regulatory landscapes.

About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as tobacco and nicotine-based products, such as cigars, snuffs and oral tobacco. Some companies also offer RRPs, such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are engaged in making devices and attachments needed in vaping and heat-not-burn products. Most products manufactured by the tobacco industry participants fall under the strict vigilance of the U.S. Food and Drug Administration (“FDA”) and are required to follow the permissible levels of nicotine in manufacturing. Players in this space sell products mostly through large retailers, distributors, convenience stores, drugstores, wholesalers and grocery chains. Some international tobacco firms also operate in the country through subsidiaries.

3 Trends Shaping the Future of the Tobacco Industry

Rising Popularity of Smoke-Free Options: Increased awareness of smoking-related health risks and stricter government policies aimed at reducing cigarette consumption have led more consumers to switch to reduced-risk products (RRPs) or smoke-free alternatives, such as heated tobacco, vapor, and oral nicotine options. These products, marketed as less harmful due to their scientific formulations and alternative consumption methods, are steadily gaining traction. Many consumers are choosing these options as a way to quit traditional cigarettes. Key tobacco companies are dedicating significant resources to expanding their footprint in this category, including investments in innovations that enhance user-friendliness and energy efficiency. As a result, companies have reported substantial revenue growth from RRPs and smoke-free products. Both Philip Morris and British American Tobacco are actively moving toward a predominantly smoke-free business model, and the continued demand for these products is expected to support positive growth as the industry undergoes transformation.

Pricing Power: Tobacco companies have capitalized on the pricing strength of traditional products, helping offset declining cigarette sales volumes. Due to the addictive nature of cigarettes, consumers are typically less sensitive to price increases, making this a viable strategy for revenue growth. Strategic pricing of cigarettes has bolstered revenues for industry players despite the ongoing drop in sales volumes.

Challenges in Cigarette Sales Volumes: The tobacco industry faces challenges from inflation, which has impacted consumer spending behavior. Economic pressures, including inflation and changing purchasing patterns among adult tobacco consumers, as well as shifts to smoke-free products, have contributed to reduced cigarette sales volumes. Regulatory restrictions on sales, advertising and manufacturing — driven by concerns over the health risks of nicotine — have also affected volumes. Given that traditional cigarette sales still account for a significant portion of revenues in the tobacco industry, declining volumes in this category present notable concerns for companies.

Zacks Industry Rank Indicates Robust Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #44, which places it in the top 18% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since the beginning of October 2024, the industry’s earnings estimate for 2024 has risen 0.8%.

Let’s take a look at the industry’s performance and current valuation.

Industry vs. Broader Market

The Zacks Tobacco industry has underperformed the Zacks S&P 500 composite while outperforming the broader Zacks Consumer Staple sector over the past year.

The industry has gained 29.1% over this period compared with the broader sector’s growth of 5.5%. Meanwhile, the S&P 500 has risen 33.4% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staple stocks, the industry is currently trading at 11.88X compared with the S&P 500’s 22.63X and the sector’s 17.28X.

Over the past five years, the industry has traded as high as 12.65X, as low as 9.1X and at the median of 10.68X, as the chart below shows.

Price-to-Earnings Ratio (Past Five Years)

3 Tobacco Stocks to Keep a Close Eye On

Philip Morris International: The company has bolstered its market standing by focusing on smoke-free products, a move that resonates with shifting consumer trends. Philip Morris is advancing toward its goal of transforming into a primarily smoke-free company by 2030. The impressive growth of its premium smoke-free brands, IQOS and ZYN, is a key driver behind the success of its smoke-free product lineup. The Zacks Rank #2 (Buy) company also benefits from its effective pricing strategies. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for PM’s 2024 and 2025 earnings per share (EPS) has increased from $6.42 to $6.51 and from $7.09 to $7.21, respectively, in the past 30 days. The consensus marks suggest respective growth of 8.3% and 10.7% year over year. Shares of Philip Morris have rallied 24.5% in the past six months.

Price and Consensus: PM