The Zacks Tobacco industry is shifting focus toward smoke-free alternatives, driven by rising consumer health awareness and stricter regulations on traditional cigarettes. Leading companies like Philip Morris International Inc. PM, Altria Group, Inc. MO and Turning Point Brands, Inc. TPB are investing heavily in reduced-risk products (RRPs) to capitalize on this growing trend.

While cigarette sales continue to decline due to inflation and changing consumer habits, the industry maintains strong pricing power, as tobacco users often remain loyal despite price hikes. This strategic move toward RRPs, combined with robust pricing strategies, positions the tobacco sector for sustainable growth in a rapidly evolving regulatory environment.

About the Industry

The Zacks Tobacco industry includes companies that manufacture and sell cigarettes as well as tobacco and nicotine-based products, such as cigars, snuffs and oral tobacco. Some companies also offer RRPs, such as e-cigarettes, vaping and heat-not-burn variants. A few of the firms are engaged in making devices and attachments needed in vaping and heat-not-burn products. Most products manufactured by the tobacco industry participants fall under the strict vigilance of the U.S. Food and Drug Administration and are required to follow the permissible levels of nicotine in manufacturing. Players in this space sell products mostly through large retailers, distributors, convenience stores, drugstores, wholesalers and grocery chains. Some international tobacco firms also operate in the country through subsidiaries.

3 Trends Shaping the Future of the Tobacco Industry

Rising Popularity of Smoke-Free Options: The rising demand for smoke-free alternatives, such as heated tobacco, vapor, and oral nicotine products, is driven by growing awareness of smoking-related health risks and stricter government regulations aimed at reducing cigarette consumption. These RRPs, marketed as safer due to their innovative formulations and alternative consumption methods, are gaining popularity as consumers seek healthier options and smoking cessation solutions. Major tobacco companies are investing heavily in expanding their presence in this category, focusing on innovations that improve user experience and energy efficiency. As a result, the tobacco industry has seen significant revenue growth from RRPs and smoke-free products, with continued demand expected to fuel positive growth and transformation within the industry.

Pricing Power: Tobacco companies have leveraged their pricing power on traditional products to counterbalance the decline in cigarette sales volumes. The addictive nature of cigarettes makes consumers less sensitive to price hikes, allowing companies to implement strategic price increases that support revenue growth. This pricing strategy has helped industry players maintain strong revenues despite the ongoing drop in cigarette sales, reinforcing the profitability of traditional tobacco products.

Challenges in Cigarette Sales Volumes: The tobacco industry is facing significant challenges in cigarette sales volumes due to persistent inflation and economic pressures that have altered consumer spending behavior. Rising costs and shifts toward smoke-free alternatives are contributing to the decline in cigarette consumption. In addition, regulatory restrictions on sales, advertising, and manufacturing, stemming from health concerns over nicotine, are further impacting sales volumes. Since traditional cigarettes still represent a major source of revenue for tobacco companies, the ongoing decline in cigarette sales poses a considerable concern for the industry.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Tobacco industry is housed within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #90, which places it in the top 36% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. 

Before we present a few stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Tobacco industry has outperformed the Zacks S&P 500 composite and the broader Zacks Consumer Staple sector over the past year.

The industry has gained 61.1% over this period compared with the broader sector and the S&P 500’s growth of 6.2% and 8.1%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing consumer staple stocks, the industry is currently trading at 14.37X compared with the S&P 500’s 19.88X and the sector’s 17.66X.

Over the past five years, the industry has traded as high as 14.44X, as low as 9.1X and at the median of 10.77X, as the chart below shows.

Price-to-Earnings Ratio (Past Five Years)

3 Tobacco Stocks to Keep a Close Eye On

Philip Morris International: The Zacks Rank #3 (Hold) company is undergoing a groundbreaking transformation, reshaping its business model to lead the industry toward a smoke-free future. Once known primarily for traditional cigarettes, Philip Morris has emerged as a dominant force in reduced-risk products, capitalizing on innovation, acquisitions and strong pricing power to fuel its evolution. By accelerating the adoption of smoke-free alternatives like IQOS and ZYN, the company is redefining its product portfolio and reinforcing its commitment to a healthier, more sustainable future — all while maintaining solid financial performance. As the company moves closer to its goal of becoming a majority smoke-free business by 2030, it continues to set benchmarks for innovation, sustainability and leadership in the evolving global tobacco industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for PM’s current financial year earnings per share (EPS) has increased 4 cents to $7.18 in the last seven days. Shares of Philip Morris have gained 76.7% in the past year.

Price and Consensus: PM

Altria Group: The Zacks Rank #3 company is making strong strides in its transition toward a smoke-free future by focusing on reduced-risk products, innovation, and regulatory compliance. Key to this transformation are Altria’s smoke-free brands, including NJOY in the e-vapor segment — now available in more than 100,000 stores — and on!, its nicotine pouch brand. Through its "Optimize and Accelerate" initiative, the company is modernizing operations, enhancing efficiency, and leveraging pricing power to maintain profitability. Altria’s progress in smoke-free initiatives, coupled with the strength of its traditional tobacco business, such as the Marlboro brand, positions the company for growth.

The Zacks Consensus Estimate for MO’s current financial year EPS has declined by a penny to $5.31 in the last seven days. Shares of Altria have surged 40% in the past year.

Price and Consensus: MO

Turning Point Brands: This manufacturer, marketer and distributor of branded consumer products, such as alternative smoking accessories and consumables, currently carries a Zacks Rank #3. Turning Point is experiencing momentum across its core brands, including Zig-Zag and Stoker’s, which continue to expand through new product launches and increased distribution. The company’s modern oral nicotine products are gaining strong consumer and retail acceptance, supported by growing demand for smokeless alternatives. Turning Point is leveraging its established sales network and strategic partnerships to boost retail presence and cross-sell its products effectively. With a focus on innovation, brand development, and customer loyalty, TPB is well-positioned to grow its market share.

The Zacks Consensus Estimate for TPB’s currency financial year EPS has remained unchanged at $3.42 over the past 30 days. Turning Point Brands shares have skyrocketed 115.8% in the past year.

Price and Consensus: TPB

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Philip Morris International Inc. (PM) : Free Stock Analysis Report

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This article originally published on Zacks Investment Research (zacks.com).

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