Tobacco Sales do not Seem to be Slowing Down

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Any investors who own tobacco stocks will have taken part in a debate about whether or not the global tobacco industry is in decline. This argument is brought up nearly every time I mention big tobacco as an investment, although there is very little evidence to support this conclusion.

I am not a smoker, but I am an investor who likes to make money, and one of the best sectors for shareholder returns is big tobacco. I tried to gather information on tobacco consumption worldwide, to establish if consumption was indeed declining at a significant rate, but it appears that there is no definitive answer.

Between the World Health Organization, The World Bank and the Center for Disease Control and Prevention, I have not managed to find a comprehensive and easily understandable set of data on the subject.

That said, I have managed to find some data that presents several different views on the subject, although, most of the data is several years old.

According to the Centers for Disease Control and Prevention (CDC), global cigarette consumption has been on a steady decline over the past 11 years, but according to the Tobacco Atlas, over the past 10 years cigarette consumption has increased 3%. Additionally,the use of non-cigarette smoked tobacco has risen 123% during the past 10 years.

In addition, this report on tobacco advertising, "Economic Theory and International Evidence," seems to suggest that the world's war against tobacco advertising is not as effective as many people think. Here is report in more detail and to summarize, the report states that "a set of comprehensive tobacco advertising bans can reduce tobacco consumption, while a limited set of tobacco advertising bans will have little or no effect."

Elsewhere, some reports suggest that the tobacco advertising ban in some countries, in particular, Norway, has actually led to a rise in tobacco consumption by up-to 30%!

So what is actually going on?

Contrary to what many anti-smoking campaigners will tell you, it would appear that smoking is not actually on the decline. For example, here are the sales figures for the four major public tobacco companies in the US - all of which are registering constant or even rising tobacco sales figures.

The first quarter of this year was affected by one fewer shipping day so data is somewhat skewed.

Philip Morris International (NYSE: PM)

 Metric

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

YoY Change

Sticks Volume Sold

219,090

238,296

236,531

233,119

204,947

-6.46%

Net Income

$2,161

$2,317

$2,227

$2,095

$2,125

-1.67%

Figures in millions

Philip Morris has seen its stick volume fall 6.5% year over year. However, this figure has been affected by the first quarter of this year, where government regulation in the Philippines hit sales. Excluding this bad quarter, sales grew 6.4% over the prior year.

Altria (NYSE: MO)

Metric 

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

YoY Change

Sticks Volume Sold

31,436

36,555

34,004

34,116

29,774

-5.29%

Net Income

$1,195

$1,225

$657

$1,101

$1,385

15.90%

Figures in millions

Altria's sales fell 5.3% year over year, although, again the company was hit by a bad first quarter (one less shipping day in the quarter also impacted). Once again, excluding this quarter, sales expanded 8.5%.

Reynolds American (NYSE: RAI)

 Metric

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

YoY Change

Sticks Volume Sold

16,300

18,100

17,400

17,000

14,900

-8.59%

Net Income

$270

$443

$420

$139

$508

88.15%

Figures in millions

Over the year, Reynolds' stick volume followed the trend, growing but falling during the first quarter 2013 as there was one less shipping day during the quarter. Excluding the poor first-quarter, Reynolds' stick volume expanded 4.3%.

Lorillard (NYSE: LO)

 Metric

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

YoY Change

Sticks Volume Sold

9,441

10,628

10,070

10,012

9,781

3.60%

Net Income

$223

$284

$283

$309

$328

47.09%

Figures in millions

Lorillard's sales volume continued to push higher as the company captured even more of the retail tobacco market. YoY the company's sales grew 3.6% and excluding the first quarter, which was affected by one less shipping day.

Can investors profit from this?

Just by knowing that the tobacco industry is not in a rapid downward spiral, investors can look at tobacco stocks in a different light. 

Of the companies listed above I believe the best bet would be Lorillard, which keeps increasing its volume of tobacco sold year after year. Then again the company is facing potentially devastating regulation from the FDA in regards to menthol cigarettes, which constitute about 80% of the company's sales. Indeed, the possibility of menthol flavoring being banned by the FDA has been haunting Lorillard for several years, however, the FDA's new boss could soon bring the issue to a close and shutdown Lorillard.

Of the other tobacco companies, I favor a domestic seller such as Altria or Reynolds, as while Philip Morris is the go-to international tobacco company, it is exposed to volatile political situations around the world and a strong US dollar, which is the reason behind the company's poor first-quarter results.

Based on that, my choice company here would have to be Altria for its diversification. The company has many additional income streams apart from tobacco. These include beer, in its holding of SABMiller, wine and many smoke-free tobacco products. In addition, the company's leading product is the Marlboro tobacco brand, which is often seen as a more luxury product, with more brand loyalty and wider profit margins.

Overall 

Despite popular opinion, sales of tobacco products do not seem to be falling as fast as many would believe and this should reassure tobacco investors. 

For those investors thinking of buying into tobacco, they should look to Altria to provide them with the returns that they desire.


Fool contributor Rupert Hargreaves owns shares of Altria Group and Lorillard. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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