Philip Morris International Inc. (PM): How to Play the Tobacco Industry

The alcohol behemoth is already witnessing a slowdown in China, and recently suggested that slowing beer sales in the U.S could shrink its FY 2014 volumes by 1% (in the country). Its operations in Latin America account for 32% of overall EBITDA and generated FY 2013 volumetric growth of just 3% year-over-year, which  is down from 9% growth in FY 2012. And management expects a further slowdown in Latin America.

Certainly SAB Miller adds stability to Altria Group Inc (NYSE:MO)’s top line and delivers more balanced growth. But on the downside, the growth rate from its e-cigarettes category will most likely be dampened by SAB Miller’s slowing growth rate.

On the other hand, Reynolds American, Inc. (NYSE:RAI) is nearly one-third the size of Altria Group Inc (NYSE:MO) (by market cap), and operates with a smaller market share. But it is also a tobacco pure play with a saturated revenue stream. This makes Reynolds American more leveraged, but a well-positioned company to capture the blockbuster growth of the e-cigarette industry. This is why its shares reached a 52-week high last week, just after the launch of the company’s Vuse line-up.

Conclusion

In my opinion, both Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) are good companies. While one offers balanced growth, the other offers industry-specific growth. Investors looking to capitalize on the just e-cigarettes industry should consider investing in Reynolds. But I’d recommend holding both the companies to hedge out the market risks and reap balanced rewards.

Piyush Arora has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International.

The article How to Play the Tobacco Industry originally appeared on Fool.com.

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