Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Big Tobacco Launches 'Safer' Cigarette. It Won’t Stem The Decline

By Charles SizemoreStock MarketsNov 21, 2014 12:44AM ET
Big Tobacco Launches 'Safer' Cigarette. It Won’t Stem The Decline
By Charles Sizemore   |  Nov 21, 2014 12:44AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

You have to hand it to Big Tobacco.  As an industry, it’s a survivor.  It’s doing everything it can to reinvent itself in a world in which its core product—cigarettes—becomes more of a social pariah with every passing year.  Let’s take a look at what Big Tobacco is up to and what it might mean for investors in Big Tobacco stocks.

Reynolds American (NYSE:RAI) made headlines last week by announcing the planned launch of the Revo, a “safe” cigarette that heats tobacco rather than burning it. Philip Morris International (NYSE:PM) has a similar product in the works for sale overseas, which I highlighted earlier this year.

Yogi Berra, the Hall-of-Fame  New York Yankee catcher, might have called this a case of déjà vu all over again. Reynolds American launched a similar product two decades ago, but it never amounted to much. (Yogi Berra, incidentally, was once a celebrity endorser of Camel cigarettes, a Reynolds American brand.)

E-cigarettes work in roughly the same way. Tobacco is heated rather than burned, and the smoker inhales a relatively harmless nicotine-infused vapor rather than a cloud of carcinogenic smoke. The benefit of the Revo is that it looks and feels more like a real cigarette than its electronic competitors do. And while it’s far too early to be breaking down profitability, I think it’s safe to say that Revo is a better profit model for Big Tobacco. Revo is a real, branded cigarette sold in a pack that can be sold at a premium, not a generic bottle of refill fluid.

I’ve been skeptical of e-cigarettes for a long time. Yes, they could relight Big Tobacco’s prospects. But they are just as likely to speed the decline of traditional cigarettes, and Big Tobacco has no durable competitive advantage in the e-cigarette marketing free-for-all.

So, are Revo and its competitors the answer for Big Tobacco?

Not so fast.  One of the reasons that Revo’s predecessor failed was that multiple states sued Reynolds American for claiming that it was less harmful than a traditional cigarette.  Those claims were unsubstantiated by real studies. So, Reynolds will have to be careful in how it markets Revo this time around the wrath of regulators.  But neutering the marketing will make it a lot harder to build a following among smokers.

In a best case scenario, Revo might steal a little market share from traditional cigarettes and slow down the long-term decline of the industry.  But that is the best case, and even under this scenario Big Tobacco volume sales would continue to decline.  The more likely scenario is that Revo is a marketing flop that is forgotten in a year or two.

From the tone of this article, you might think that I’m a dyed-in-the-wool Big Tobacco bear. Nothing could be further from the truth. At the right price, industries in terminal decline can be great investments if management focuses on returning value to shareholders via dividends and buybacks. But the key is “at the right price.”  And right now, Big Tobacco stocks are expensive.

Reynolds American trades for 21.5 times trailing 12-month earnings…and at a cyclically-adjusted price/earnings ratio (the “CAPE” or “Shiller P/E”) of 26.0 times earnings.  The numbers for domestic rival Altria (NYSE:MO)  are 22.5 and 24.3, respectively.  As a point of reference, the S&P 500 trades at 20.0 times trailing earnings and 26.6 times CAPE—a valuation that is 60.2% above its long-term average.

In other words, U.S. stocks are very expensive by historical standards, and Big Tobacco stocks are only a hair cheaper that the broader market.  And again, this is an industry in terminal decline—which should be trading at a substantial discount to the market average.

Disclosure: In the interests of full disclosure, I have very small positions in Altria and Philip Morris International that I have held for years in a long-term dividend reinvestment portfolio.  But I’m not adding any new funds to either, and I recommend steering clear of Big Tobacco at current prices.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.

Big Tobacco Launches 'Safer' Cigarette. It Won’t Stem The Decline

Related Articles

Big Tobacco Launches 'Safer' Cigarette. It Won’t Stem The Decline

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email