Results from Wells Fargo’s recent “Tobacco Talk” survey of retailer and wholesalers representing roughly 25,000 convenience stores in the U.S., showed the overall tobacco environment remains “in good shape despite a well-telegraphed deceleration in cigarette volume,” according to Bonnie Herzog, senior analyst for Wells Fargo.
She pointed to the following reasons:
(1) solid cigarette manufacturer net price realization of around 5-6% in Q4 despite an estimated -5% reported decline in industry cig volumes (-2.5-3% adj) as it reflects reversion to historical declines, deloading impact and one fewer shipping day;
(2) a strong adult tobacco consumer supported by wage growth; and
(3) a rational but slightly more competitive environment with mid-tier brands losing to premium/super premium brands.
Key winners according to Wells Fargo: Newport on RAI’s every-day-low price (EDLP) platform with Marlboro a close second, Natural American Spirit (NAS) in super-premium cigs, and Copenhagen in smokeless.
“We remain positive on the U.S. tobacco sector relative to consumer staples peers and see an attractive risk/reward to owning Altria (MO) and Reynolds American Inc. (RAI) despite rich, M&A-influenced valuations, given: (1) their strong underlying growth prospects and stable cash flows, (2) positive feedback from our retailer contacts, and (3) potential benefits from the proposed U.S. corporate tax reform,” Herzog said.
More than 55% of retailers are optimistic about reduced-risk products (RRPs) and their awareness and interest in heat not burn technologies, and iQOS (the latest incarnation of Philip Morris International’s (PMI) “HeatStick” concept) specifically, has increased, laying the groundwork for an eventual industry pivot toward RRPs as the next growth catalyst, Herzog noted. “Bottom line – We see this as strongly positive for MO given its alliance with PMI on iQOS since we continue to expect the commercialization of iQOS as early as late FY17/early FY18. Retailers also expressed optimism for RAI’s VUSE platform given its strong development track record,” she added.