Core Viewpoint - The tobacco sector, particularly Imperial Brands, has shown significant recovery and is being reevaluated by investors, indicating that Big Tobacco is not dead and is being priced at more realistic valuation multiples [1][23][24] Group 1: Imperial Brands Analysis - Imperial Brands' stock has gained almost 60% since the mini-crash in October 2023, outperforming major competitors like British American Tobacco (BTI), Altria Group (MO), and Philip Morris International (PM) [1][2] - A discounted cash flow (DCF) analysis suggests that even under conservative assumptions, Imperial Brands remains undervalued, with a fair value of £18.2, indicating a potential overvaluation of around 20% at the current price of £21.6 [3][6] - The company's strong free cash flow (FCF) margin of over 30% of net revenue provides a significant margin of safety, making the stock less sensitive to long-term decline expectations [5][24] Group 2: Altria Group Analysis - Altria's cigarette volumes have declined by 11.5% in the first half of 2024, but the company maintains strong pricing power through its Marlboro brand [8][10] - A DCF analysis indicates that Altria's fair value is only 53 does not align with expected returns [12][14] - Despite challenges, Altria's positioning in smoke-free products shows potential, but significant uncertainties remain regarding its future cash flow growth [11][14] Group 3: British American Tobacco Analysis - British American Tobacco's stock is perceived as undervalued, with a significant portion of its revenues coming from smoke-free products, which accounted for 18% of net revenues in the first half of 2024 [16][18] - The company is making progress in reducing its debt and has announced a share buyback program, which may enhance shareholder value [16] - A DCF analysis suggests that BTI shares are slightly undervalued today, with a fair value that could support a return of 9.1% per annum under conservative assumptions [17][18] Group 4: Philip Morris International Analysis - Philip Morris International has reported strong growth in its smoke-free product segment, which now accounts for 38% of total net revenues, with a year-over-year growth of 13.6% [19][21] - The stock is currently trading at a blended P/E ratio of 19.5, which is high for a tobacco company but justified by its growth prospects [19][21] - Despite the potential for a short-term correction, the strong performance of PMI's smoke-free products and its cigarette business positions it favorably for future growth [22][24]
Imperial Brands Goes Boom, Is There Still Value In The Tobacco Sector?