Tobacco earnings are coming - time for a share price recovery?

Earnings season is here for the tobacco sector. Altria (NYSE:MO) is in the leadoff position with its Q4 earnings report due out on February 1, while Philip Morris International (NYSE:PM) will spill numbers on February 8. Altria (MO) will look to shake off a streak of seven straight quarterly revenue misses, while Philip Morris (PM) has topped EPS marks in 12 straight quarters. Both stocks are down slightly in 2024 into the earnings reports. Sector-wide cigarette volume is expected to have fallen during Q4 amid inflation pressures and a rise in illegal vapor sales.

Looking to the regulatory roadmap for the year, the FDA has pushed back anticipated menthol cigarette regulations to March and announced its intent to provide more information to establish a maximum nicotine level in cigarettes in April. However, in an election year, those issues could kicked further down the road. Bank of America noted that the long-term prospects of the U.S. nicotine category.

"Once final details are released, we expect manufacturers and other stakeholders to initiate litigation to prevent these rules from being implemented," updated analyst Lisa Lewandowski. That litigation is seen as likely delaying any such action by the FDA. If the rules were to be implemented, a large rise in illicit trade is anticipated given adult consumer demand for flavors and nicotine in cigarettes. "We expect the influx of flavored disposable vapor products to continue to disrupt legal US nicotine producers," previewed Lewandowski. Last month, the World Health Organization called for a ban on flavored e-cigarettes as a way to stem the rise in popularity of the products. While 34 countries have made e-cigarettes sales illegal, 88 have no minimum purchase age, and 74 countries have no regulations in place, according to the WHO.

The tobacco sector was jolted in December when British American Tobacco p.l.c (NYSE:BTI) slashed the value of some U.S. cigarette brands. Chief Executive Tadeu Marroco described the move as "accounting catching up with reality" as the brands are not expected to have indefinite value of about $80B on the balance sheet. British American Tobacco (BTI) took a $31.5B non-cash adjusting impairment charge to account for the new brand values. BAT plans to start amortizing the remaining value of its U.S. combustibles brands in 2024.

Investors have generally been skittish in the tobacco sector following the regulatory and BTI developments. Over the last six months, shares of BTI fell 13%, Altria (MO) was down 12%, and Philip Morris International (PM) shed 8%. Imperial Brands PLC (OTCQX:IMBBY) (OTCQX:IMBBF) +4% and Japan Tobacco (OTCPK:JAPAY) (OTCPK:JAPAF) +16% managed to see gains for the six-month period that included several jolts of negative news.

Time for a turnaround?

Despite some of eye-opening headlines, Wall Street analysts are very positive on the setup for investors in the broad tobacco sector. The list of names with consensus Buy ratings includes Vector Group (VGR), Philip Morris International (PM), Turning Point Brands (TPB), British American Tobacco (BTI), Altria (MO), RLX Technology (RLX), and 22nd Century Group (XXII). The tobacco sector stock with the highest Seeking Alpha Quant Rating is Imperial Brands PLC (OTCQX:IMBBY) (OTCQX:IMBBF). In terms of diversification, Philip Morris (PM) is considered one of the strongest players in smoke-free products, and the company's investments are expected to start paying off. Of course, for dividend investors, the tobacco sector is a feast. Some of the juicy yields for new buyers includes British American Tobacco (BTI) at 9.69%, Altria (MO) at 9.55%, and Vector Group (VGR) at 7.35%.