Why tobacco stocks have dropped 20 percent this year?

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    Why tobacco stocks have dropped 20 percent this year?

    Tobacco stocks have fallen sharply this year with concerns that tobacco produces will struggle to switch to newer technologies.

    What happened to tobacco stocks?

    Tobacco stocks are broadly down in the first half of the year.  As of July 12, 2018, the world’s three largest tobacco companies have each lost about 20% this year. According to data from S&P Global Market Intelligence, the shares of Altria (NYSE: MO), the U.S. seller of Marlboro, dropped 18%; the stocks of Philip Morris (NYSE: PM), the international distributor of Marlboro and other brands, has dropped 21%. Plus the shares of British American Tobacco (NYSE: BTI), which sells brands such as Dunhill and Pall Mall, fell 22 percent.

    As the chart below shows, the three shares have moved roughly the same since the beginning of the year. The tobacco industry is struggling to cope with the global trend to quit smoking cigarettes. Because of health concerns and trying to successfully switch to alternatives like e-cigarettes. As a result, the once-reliable sector has suffered this year, with all three major stocks suddenly falling in April.

    Why tobacco stocks have lost 20 percent this year?
    So what

    On April 19 this year, when Philip Morris released a disappointing first-quarter earnings report, the worst day of tobacco stocks arrived. This is a bad omen for the industry on a number of fronts. The stock had its worst day in more than a decade, down 16%.

    People worried that the growth of the company’s new heat-but-not-burn vape-like product, iQos, was slowing down after initial success in Japan. Japan is a key market for Philip Morris. Martin King, chief financial officer, said that after the company lifted a sales restriction, the device sales were slower than their ambitious expectations. Notably, iQos has 38 markets, but not include the U.S.

    Philip Morris’s $6.9 billion revenue was also below its $7.03 billion forecast. Altria shares also fell 6% on the news because it has reached a research-sharing agreement with Philip Morris that would allow it to sell the iQOS in America if it were legalized. British American Tobacco, which has high hopes for vaping as well, fell 5% on the same day.

    At the same time, the shares of British American Tobacco dropped 13% in February. In this company fourth-quarter report last year, it reported modest organic earning growth after its acquisition of Reynolds American.

    Altria’s shares also fell in the first few months of the year, although the company’s earnings growth was satisfactory and its dividend increased unexpectedly as a result of the U.S. corporate tax cut.

    Now what

    The industry-wide sell-off after Philip Morris’ latest report on the iQOS shows something interesting. It shows how much tobacco investors want the industry to successfully transform into smokeless products. Like vapes and  “heat-not-burn” devices to replace the revenue from cigarettes. Despite the drop in sales, tobacco stocks fetch moderate P/E valuations — around 16 — bolstered by strong dividends.

    Why tobacco stocks have lost 20 percent this year?In addition to the general decline in cigarette sales, there are concerns about the shift to vaping in the industry could allow smaller rivals to beat the tobacco giants. This seems to have happened to Juul, America’s fastest-growing e-cigarette maker, which provides a product which has become synonymous with the activity itself — “Juul” is commonly used as a verb meaning “vape”.

    Last year, during a four-week period, Juul’s sales surged 621% and the company is now raising money at a valuation of $15 billion. For the tobacco giant, the best move may be to acquire Juul. To form strategic partnerships or make generic products.

    It is also possible that the slowing growth of iQOS is just a blip? As this was just one single event in one country. Philip Morris also explained that the slowdown was partly because the company is focusing on converting an older clientele to new devices.

    It’s surprising to see such a lucrative industry sell-off like this in only six months. But the investors’ reaction showed that tobacco stocks may no longer be the safe bet that they have been for generations.

    Ryan

    Ryan is a writer, editor and content creator who spends most of his time bringing the interesting, entertaining, original and well-written articles to vapers. He believes that vaping is not only a healthier alternative to smoking, but also a great experience of life.