3 Best Tobacco Stocks to Add to Your Portfolio Right Now

NEW YORK (TheStreet) -- The tobacco industry is undergoing a transformation. Cigarette sales, the bulk of revenues, are decreasing by volume, while smokeless tobacco and e-cigarette volumes are increasing.

Tobacco companies are still increasing revenues on cigarette sales, even as volume decreases (for every 10% increase in price, cigarette sales volume only decreases 3%-to-5%), but how long can that last? 

Three companies, Altria (MO), Philip Morris (PM), and Reynolds American (RAI), (which is set to merge with Lorillard in a $27 billion deal), control 85% of the domestic tobacco industry, with Altria being the leading company.

So what are the best tobacco companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.

TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Check out which three tobacco companies made the list. And when you're done be sure to read about which mid-cap oil companies to sell now. Year-to-date returns are based on May 1, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.

 

MO ChartMO data by YCharts
3. Altria Group, Inc. 
( MO)
Rating: Buy, B+
Market Cap: $99.7 billion
Year-to-date return: 2.8%

Altria Group, Inc., through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States and internationally.

"We rate ALTRIA GROUP INC (MO) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, expanding profit margins, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 23.1%. Since the same quarter one year prior, revenues slightly increased by 6.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Tobacco industry and the overall market, ALTRIA GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for ALTRIA GROUP INC is rather high; currently it is at 58.97%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 23.82% is above that of the industry average.
  • Net operating cash flow has increased to $2,498.00 million or 17.55% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -31.46%.
  • ALTRIA GROUP INC's earnings per share declined by 11.9% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, ALTRIA GROUP INC increased its bottom line by earning $2.57 versus $2.26 in the prior year. This year, the market expects an improvement in earnings ($2.81 versus $2.57).

UVV ChartUVV data by YCharts
2. Universal Corporation 
(UVV)
Rating: Buy, A-
Market Cap: $1.1 billion
Year-to-date return: 6.8%

Universal Corporation operates as a leaf tobacco merchant and processor worldwide. It is engaged in procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products.

"We rate UNIVERSAL CORP/VA (UVV) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • UNIVERSAL CORP/VA has improved earnings per share by 37.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, UNIVERSAL CORP/VA increased its bottom line by earning $5.25 versus $4.66 in the prior year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Tobacco industry. The net income increased by 37.5% when compared to the same quarter one year prior, rising from $38.59 million to $53.04 million.
  • The current debt-to-equity ratio, 0.36, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.10, which illustrates the ability to avoid short-term cash problems.
  • Net operating cash flow has increased to $352.12 million or 20.17% when compared to the same quarter last year. In addition, UNIVERSAL CORP/VA has also vastly surpassed the industry average cash flow growth rate of -31.46%.

RAI ChartRAI data by YCharts
1. Reynolds American Inc. (RAI)

Rating: Buy, A+
Market Cap: $39.4 billion
Year-to-date return: 15.3%

Reynolds American Inc., through its subsidiaries, manufactures and sells cigarettes and other tobacco products in the United States. It operates through RJR Tobacco, American Snuff, and Santa Fe segments.

"We rate REYNOLDS AMERICAN INC (RAI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, increase in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 23.1%. Since the same quarter one year prior, revenues slightly increased by 6.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Tobacco industry and the overall market, REYNOLDS AMERICAN INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Tobacco industry. The net income increased by 7.2% when compared to the same quarter one year prior, going from $363.00 million to $389.00 million.
  • Net operating cash flow has increased to $1,080.00 million or 18.42% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -31.46%.
  • The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 59.89%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 18.91% trails the industry average.
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