Fellow contributor Robert Ciura notes that he would avoid both Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) due to their exposure to the methanol brands, where Lorillard has the key menthol brand Newport, and Reynolds sells Salem. cigarettes.
U.S. sales leader
The dominant force in the U.S. tobacco market is, and has been for some time, Altria Group Inc (NYSE:MO). Revenue is expected to be up 1% in 2013, thanks to mid-single-digit volume growth in the smokeless-tobacco segment.
Meanwhile, revenue is expected to be up 3% in 2014. Altria Group Inc (NYSE:MO) has a robust product portfolio, which includes Marlboro, Virginia Slims, Copenhagen, Skoal, Chateau Ste. Michelle and Columbia Crest.
The move to more smokeless products should not only help drive revenue higher, but also boost margins. Last quarter, gross profit was up 2.4% year-over-year thanks to a lower cost of sales. The smokeable-products category saw operating income rise 1.5% last quarter, while the smokeless-products segment’s operating income was up 12.5%.
Altrai’s smokeless tobacco brands, Copenhagen and Skoal, continue to gain market share. From 2008 to 2012, Copenhagen and Skoal together saw their market share rise from 47.5% to 50.6%.
Revenue growth and expansions
Reynolds American, Inc. (NYSE:RAI) expects to see revenue grow slightly in 2013 and 2014. The company is looking to embrace the increase in smokeless tobacco volumes, expecting to see increased volume in its American Snuff segment.
Reynolds American, Inc. (NYSE:RAI) is also expanding its tobacco brands by offering new mint flavors for the Camel brand. Reynolds also offers a super premium brand, Natural American Spirit. The tobacco company recently announced 2Q EPS of $0.84, compared to $0.79 last year. However, cigarette shipments did fall 6% last quarter, and market share fell from 26.3% to 26%. Even still, worth noting is that its Pall Mall and Camel brands’ market share was up 0.9 percentage points to 17.6%.
Lorillard Inc. (NYSE:LO) also recently posted strong 2Q EPS results. EPS came in at $0.81 versus $0.73 for the same period last year. Lorillard continues to grow market share nicely. Back in 2012, Lorillard’s market share increased 0.3 share points to 14.4%.
Meanwhile, Lorillard Inc. (NYSE:LO) launched a variation of non-menthol products in late 2010 to help expand beyond the Newport Menthol brand. Lorillard is also turning to e-cigarettes. The company acquired blu eCigs, which contributed $61 million to sales 2012. During 1Q 2013, Lorillard expanded the blu eCigs distribution to more than 80,000 retail outlets and captured over 40% of the e-cig retail market share.
Bottom line
As I mentioned before, Lorillard Inc. (NYSE:LO) is the best investment on a number of fronts. This includes valuation, volatility and dividend.
Up until mid-2011, the three tobacco companies actually traded inline with each other, and since the FDA overhang, Lorillard has been trading below the industry.
The FDA scare arose back in 2011, where the tobacco industry has been resilient through the years, showing remarkable innovative powers and I don’t think that will change anytime soon.
All three tobacco companies have been diversifying their revenue streams and expanding their portfolios. The beauty about the tobacco industry is that its products are highly addictive, providing for stable revenue. This industry has grown revenue over the years despite a 3% annualized decline in cigarette consumption over the past decade. Growth in e-cigarettes could be the next big growth avenue for these stocks.
All in all, it’s not that I don’t like Altria Group Inc (NYSE:MO) or even Reynolds American, Inc. (NYSE:RAI), I just like Lorillard Inc. (NYSE:LO) better given its valuation. Altria and Reynolds both trade with PEG ratios of 2, while Lorillard’s is at 1.1.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article The FDA Presents Another Great Buying Opportunity originally appeared on Fool.com.
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