As disposable income increases among tobacco consumers, combustible cigarettes are making their comeback.
According to a report from Wells Fargo, cigarette industry volume is currently trending above historical ranges. There was virtually no downside risk in the tobacco industry during fiscal year 2015, but volume is expected to be down slightly in the third quarter. Results from the third quarter “Tobacco Talk” revealed that the tobacco industry remains bullish.
Wells Fargo reported that both Reynolds American Inc. (ROI) and Altria Group Inc. have experienced favorable risk/reward ahead of third quarter results. Some of these companies’ success is being attributed their agreement with NY, which resulted in non-participating manufacturer (NPM) credits, further bolstering the companies’ ability to drive their top-line and EPS growth as savings are either reinvested or flow to the bottom line.
RAI remains the top stock pick for Wells Fargo due to “its greater ability to generate double-digit EPS growth due to incremental share gains with Newport and huge cost savings,” said Bonnie Herzog, senior analyst, Wells Fargo.