I’m following up on my last article with this piece. It’s important to show how Imperial Brands compares to its peers from a relative valuation perspective, but also discuss their activities in non-combustibles. Click here if you haven’t read the previous piece on Imperial Brands.
As mentioned, my articles should be considered a “First Look” and while I supply quite a bit of info, they are not deep dives.
I looked up peers on a Capital IQ terminal, and the below is what remained after removing all the small-caps. The list is sorted by market cap in USD in billions.
Market Cap (USD, billions)
Philip Morris International $249.8
Altria $96.8
British American Tobacco $92.1
ITC LTD $62.0
Japan Tobacco $52.2
Imperial Brands $32.1
Smoore $9.0
Valuation
Imperial Brands has the 2nd-lowest forward P/E ratio at 9x
If we look at the entire capital structure and incorporate debt, then we see that Imperial Brands has the lowest forward EV/EBITDA ratio at 8x
My favorite stat, though, is free cash flow. “Show me the money!” or, as my professor back at Illinois used to say, “Keep your eye on the cash flow.” Not as flashy but the damn truth! Here we see Imperial Brands’ FCF generation during the last fiscal year as a percentage of enterprise value. It’s the 2nd highest at 9%.
So, a quick first thought here is British American Tobacco (BATS) also looks cheap. If you want to check out BATS, then I recommend you listen to the podcast episode I did with my friend Evan Tindal of Bireme Capital. Audio links: Spotify and Apple Podcasts. Video link: YouTube. You can find links to other podcasts I did here
Dividend Yield
Every investor I know who invested in tobacco stocks was interested in one thing. Dividends. So, no comparison would be complete without showing the dividend yields. British American Tobacco is again at the top.
British American Tobacco: 7.6%
Altria: 7.1%
Imperial Brands: 5.8%
Japan Tobacco: 4.6%
Philip Morris International: 3.4%
ITC LTD: 3.2%
Smoore: 0.9%
Growth
A low valuation can usually be explained by other factors. Let’s take a look at the consensus estimates for growth.
The chart above shows that both Imperial Brands and BATS are in the bottom three with regard to short-term sales growth. EPS growth looks a lot better for Imperial Brands, with growth on par with Philip Morris (see below).
Other Metrics
Imperial Brands’ ROE is high at 43%; however, the operating margin is lower than its peers. And while Smoore and Japan Tobacco are lower (along with lower ROEs) however their businesses are somewhat different. Poor return on equity from British American Tobacco. Not shown here, but their ROIC is also disappointing.
Below are some additional tables to help you in your analysis if this is a sector of interest.
Non-Combustibles
Time to take a look at the future, and that future is non-combustibles. I don’t know about you, but I see fewer and fewer cigarettes. What I am seeing is people sucking on USB drives :)
The market leader is Philip Morris International, which explains their higher multiple. c40% of revenues came from non-combustibles in 2024.
Not only is smoke-free a large part of their business, but it’s also growing at double digits!
IQOS, its flagship heated tobacco product, has surpassed Marlboro in net revenue, generating over $11b. The company’s goal is for smoke-free revenue to exceed 66% of revenues by 2030.
British American Tobacco is the No.2 player with c18% of revenue from smokeless products such as Vuse, Glo and Velo. The company plans on increasing those revenues to at least 50% by 2035.
Altria’s smoke-free portfolio represents c10% of revenue with the goal of increasing them to c$5b by 2028. I’ve owned Altria a few times and made money in it every time. But I removed it from my watchlist as I wasn’t happy with their acquisition decisions, where they were overpaying and appeared to be making desperate moves in the non-combustibles segment.
Japan Tobacco generates under $1b in revenues from “reduced risk products” (RRP). RRPs include heated tobacco sticks (HTS), infused-tobacco capsules (Infused), E-Vapor, and Oral. While they plan on growing this via their Ploom product, it is a smaller player in comparison. Furthermore, 5.9% of revenues are from their processed food segment and 3.1% from pharmaceuticals. With multiple unrelated businesses and core combustibles, there is the risk that RRPs are not given the appropriate attention
Imperial Brands’ Next Generation Products are also under $1b in revenues. As mentioned in the previous article, the company plans on growing this revenue at a double-digit CAGR. They will have a lot of catching up to do if they are to remain relevant in this game.
Smore International claims to be the world’s largest manufacturer of vaping devices and components. The company trades in Hong Kong, and generates c80% of its revenue from corporate clients (B2B) in vaping and heat-not-burn (HNB). British American Tobacco is a client. The CEO is Zhiping Chen, and he owns 34%. Another 36% is also controlled by Chinese entities.
ITC is the market leader in cigarettes in India. It doesn’t appear to have non-combustibles. In addition, there are several other lines of business such as FMCG, paper, agriculture, and a hotel business, that demerged into ITC Hotels.
A key takeaway is how small Imperial Brands’ non-combustibles segment is compared to its peers. So, that low multiple could be justified. An industry acceleration would benefit Philip Morris, and that’s what the market is betting on (reflected in the higher multiple). BATS looks like a good balance of valuation and smokeless; however, even at No.2 they are far behind Philip Morris. It’s up to each investor to decide what they think has been priced in.
Let me know your thoughts in the comments!
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