Earnings Preview: What to Expect From Big Tobacco

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Here at the Fool, we love our seasons: football season, flip-flop season, and our favorite -- earnings season. It's that wonderful time of year when we get to celebrate those picks that outperformed and be humbled by those that didn't.

Each quarter we get to arm ourselves with a new set of expectations and estimates with which to better judge the economic landscape. We may not always nail our bets, but taking the initiative to learn about the expectations for a given sector will place investors well ahead of many of their peers. Woody Allen put it best when he observed, "Eighty percent of success is showing up."

With that in mind, here is what you can expect to see out of some of the biggest tobacco companies this earnings season just by showing up and staying engaged.

Company

Report Date

Est. Earnings

Year-Ago Earnings

% Change

Altria (NYS: MO) Jan. 27$0.49$0.4411%
Reynolds American (NYS: RAI) Jan. 30$0.69$0.648%
Philip Morris (NYS: PM) Feb. 9$1.10$0.9713%
Vector Group (NYS: VGR) Feb. 20N/A$0.11NM
Star Scientific (NAS: CIGX) March 13-18N/A($0.04)NM

Earnings dates & estimates from Yahoo! Finance. Star Scientific release range from Earnings.com. N/A = not available. NM = not meaningful.

While there are some small changes here, there aren't any earnings that dramatically stand out one way or the other, and that shouldn't be so surprising. Tobacco companies are classified as a consumer staple because of their noncyclical nature and predictable performance. Companies in this space rarely have blowout quarters or huge misses.

Drilling down
Just because a sector is known for stability, though, doesn't mean there isn't anything to watch.

  • With domestic cigarette consumption in a slow but steady decline, placing long-term bets with Altria may not seem like the wisest investment decision. However, this is the company whose share price rose an impressive 42% over the past five years while the Dow Jones was essentially flat. Also remember that this company yields a market-stomping 5.7%, and if it weren't for its spinoffs of Philip Morris and Kraft, it would surely make the dividend aristocrat list. Though fellow Fool Sean Williams is quick to note the recent layoffs of 15% of its workforce and thinks the company isn't worth much more than its dividend income, in an uncertain market that may not be the worst thing. Look for a predictable earnings season, perhaps trending toward the low end of estimates.
  • Reynolds American has some difficult headwinds. The company is facing increasing competition in the smokeless tobacco space from Altria and Star Scientific, and even Lorillard is getting involved now. Its Camel brand is a far cry from the brand strength of Altria's Marlboro, and the sale of its international tobacco rights to Japan chokes their potential abroad. It's no doubt all of these factors and more that have analysts relatively mum on this earnings season and expecting only an 8% climb in EPS.
  • Philip Morris has been my longtime favorite in the tobacco space, and 13% expected EPS growth is just another reason. The company has some of the best international growth prospects, a steady dividend, and the international rights to the valuable Marlboro brand. I don't expect blowout earnings, but I sure am happy with the expected 13% growth over last year.
  • Vector Group and Star Scientific are the dark horse candidates here. Vector group is the small domestic company specializing in cigarette sales and real estate. It lacks the brand strength of a Reynolds or Altria, which is exactly what you need in a shrinking market. The company yields a monster 9% dividend, but with a payout ratio consistently over 100%, it's hardly sustainable. It has posted at or around $0.11 EPS for the past few years in the first quarter, so don't expect it to stray far from that range, and probably trend on the low end. As for Star Scientific, the smokeless-tobacco-making, loss-making company is, in my mind, going to lose money again. Its most recent losses accelerated from the year earlier, and despite early traction of its Anatabloc supplement, don't expect it to drag the company into the black this quarter.

The better way to play earnings
Staying glued to quarterly reports certainly can be exciting, but it sure isn't sustainable. Trying to play quarter-to-quarter swings will certainly burn investors sooner or later. If you're hunting for a better, long-term solution, I invite you to read The Motley Fool's special free report: "3 American Companies Set to Dominate the World."

In it, you'll uncover three ultra-stable companies whose best growth years are still ahead of them. They've set their sights internationally, and are taking emerging markets by storm. The report is free, but it won't be here forever, so click here to access your copy.

At the time this article was published

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