One Smoking Hot Tobacco Company
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s a fact well known that, smoking is dangerous to health. Even after numerous warnings if people don’t leave the bad habit, investors have the opportunity to capitalize on it. Tobacco industry unlike other industries is not affected by the state of the economy. Its consumers include addicts that cannot quit these tobacco products. The more addicts, the more stability of revenues, that’s the simple formulation.
In March 2012, the Secretary of the State of California spoke about legalizing marijuana, which will be in the state’s November ballot. In Colorado too, a similar vote will be held. Washington in a similar bid believes that it would be able to generate up to $2 billion by taxing marijuana. The revenues, as told to the press, would be eventually used to reduce the debt burden on the states.
Marijuana has a huge market in the US. There were about 85,000 arrests in 2008 alone. While these were only the arrests, it’s hard to even come up with a number of consumers for this grey industry. Many citizens are in favor of marijuana legalization, and any positive news for the industry would directly benefit the tobacco industry.
The legalization of marijuana, just like alcohol, would no doubt attract new consumers. The companies would then thrive to introduce new smoking products. By the legalization of marijuana, the tobacco industry is expected to improve on the current smoking technology. This would make the tobacco companies more attractive for new investments. Companies like Lorillard, Philip Morris and Altria are likely to benefit from the boom, primarily because they are well established names in the industry.
Altria yields 5.12%; and in its recent results reported half yearly earnings to be $1.08 per share, with revenue of $11 billion. The earnings of the company with a market capitalization of $69.93 billion were up 10.2%. The company trades at 15.93x P/E with a debt/equity ratio of 3.2.
Philip Morris (NYSE: PM) , a company that yields 3.44%, reported a 7.4% climb in earnings. The semi-annual earnings stood at $2.60 with $15.6 billion in revenues. The company has a huge market capitalization in excess of $151 billion, and the shares trade at 17.78 P/E.
Lorillard (NYSE: LO) currently yields 4.9%. The company with a market capitalization of $1.08 billion reported a 5.9% increase in earnings. The EPS stood at $3.87 on revenues of $3.25. The shares of Lorillard Inc. trade at 15.57x P/E, and from the above comparison, it’s clear that Altria has the best mix of EPS returns, dividend yield and modest valuations, making it our stock pick.
Cigar manufacturers like Imperial Tobacco (NASDAQOTH: ITYBY.PK) and British American Tobacco (NYSEMKT: BTI) are also expected to see an upside. Imperial tobacco which owns Phillies cigar; and British American Tobacco which offers Dunhill cigars, are expected to benefit because the cannabis users tend to empty to default contents of the cigars, and fill them up with marijuana. This would boost the sales of the cigar makers.
The outlook for the tobacco companies looks bright, and with the regulations round the corner, the stocks could be getting ready for a stellar increase in price. Legalizing marijuana could be a complete game changer for the industry, and if the response is good, other states might follow, but that’s only speculation. For what it’s worth, all the stocks mentioned appear to have a great future, but our recommendation would be Altria for having a good mix of numbers.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.