2018 has been tough for tobacco companies. The increased anti-tobacco regulations, the declining smoking population, and the rising competition in the RRP (reduced-risk products) space have been putting pressure on tobacco companies. The stock prices of Altria Group (MO), Philip Morris International (PM), and British American Tobacco (BTI) have fallen by 25.3%, 20.3%, and 48.8% YTD, respectively. Meanwhile, the stock price of the Consumer Staples Select Sector SPDR ETF (XLP), which invests 12.3% of its holdings in cigarette and tobacco companies, has declined by 3.8% YTD.
The decline in Altria’s stock price
Despite beating analysts’ EPS expectations in all three quarters of 2018, Altria stock has declined due to the decline in total shipment volume in the smokable products segment and the announcement by the FDA on November 15 that in its efforts to curb smoking among young people, the agency would advance rules to ban menthol-flavored cigarettes and cigars. Menthol products form a significant part of the company’s profits. Bloomberg estimated that menthol cigarettes account for 20% of Altria’s profits. So, investors fear that the banning of menthol cigarettes could significantly dent Altria’s earnings.
The decline in Philip Morris’s stock price
Philip Morris has also outperformed analysts’ EPS expectations in all three quarters of 2018. However, a decline in cigarette shipment volumes in the first three quarters of this year and slower IQOS sales growth in Japan have dragged down the company’s stock price. The IQOS sales deceleration appears to have made investors skeptical of its long-term potential. The company’s stock price was also negatively impacted by increased competition from other reduced-risk products.
In this series, we’ll look at the performance of Altria Group and Philip Morris International in the first three quarters of 2018. We’ll also cover analysts’ expectations for 2018 and 2019. Finally, we’ll end this series by looking at analysts’ recommendations and the valuation multiples of both the companies. First, let’s look at the revenue of both the companies in the first three quarters.