Though there are plenty of reasons investors might worry that tobacco's days are numbered, the folks over at Altria Group (NYSE:MO) don't seem too worried. Today the headlines buzzed with confirmation of a long-predicted price hike. Really it was more like the revocation of a wholesale markdown, with the final effect estimated at about a dime a pack.
Is this really good news for the entire industry, as is being so widely reported today? If so, it's worth only a half a point at big producers such as Reynolds American (NYSE:RAI) and Imperial Tobacco (NYSE:ITY). The steady consumption of tobacco despite heavy taxes, odd fire regulations, and the sometime-pariah status of smokers might suggest that tobacco companies have some degree of pricing power, but the quarterly market-share results prove that this is a complex dance. Smokers will move to cheaper butts if they have to, which is why investors shouldn't get overly excited by the short-term positives heralded by the move. If consumers migrate to other brands, you can bet the coupons will come back.
That's not to say investors shouldn't look at tobacco stocks, which have been pretty decent performers lately, not surprising given the solid results they've been posting. Perhaps it also reflects easing fears about litigation overhead -- something there's less of at UST, which butters its bread with smokeless products. Despite Altria's recent price recovery, there could be more upside ahead. Measured by P/E and enterprise value-to-free cash flow ratio, it's still cheaper than the peers mentioned here, and it's got superior margins to all except UST.
For related Foolishness:
- Is Altria's potential value already unlocked?
- Are tobacco's days numbered?
- Safer smokes? You must be kidding.
Seth Jayson has positions in no firm mentioned.
