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This Tobacco Company Is a Bit More Ethical than Others

Monday - 8/19/2013, 5:46am  ET

The business model of tobacco companies is relatively flawless. These companies are selling a highly addictive substance to the general population, and this means that they can raise prices will little effect on sales. 

A societal trend towards nonacceptance of tobacco has me concerned that many tobacco stocks are overvalued, however. While the business model was perfect in the mid-1900's, the general public is now aware that the product has serious health effects. As a result, it is becoming totally uncool to smoke.

Altria makes a big mistake

In order for Altria Group to really benefit from the change in tobacco culture, it needs to develop new products. It should focus less on being a tobacco company and more on being a nicotine company. If it is able to develop a line of smokeless cigarettes, it could profit. The company recently sold the majority of its non-tobacco segments, however, and that has me concerned that it won't be profitable in the years ahead.

By focusing its efforts on an industry that is facing ever-increasing scrutiny, the company will likely fail. One of the main challenges is that its product kills people. Five decades ago, that statement would be libelous; now, however, the secret is out and has prevented new smokers from lighting up. 

Analysts believe that there are enough smokers to keep this company growing, but its not really due to revenue growth. Revenue is expected to increase by just 0.2% this year and 1.5% next year. Earnings per share, however, are set to advance 8% this year and 7% next year.

Lorillard is a bit more ethical

Lorillard is a tobacco company that is changing with the times. The firm is a leader in e-cigarettes, electronic nicotine delivery systems that simulate the smoking experience and gives people a healthier injection of nicotine. The company continues to develop these products and make them more user friendly, and this will help it to rake in profits in the years ahead. 

The company is still heavily invested in traditional cigarettes through its Newport brand, however. The FDA is expected to heavily regulate menthol cigarettes in the near future, though. Given that Newport is best known for its menthol variety, this regulation could stomp out sales. 

Analysts look to be optimistic about the popularity of e-cigarettes. Revenue is expected to grow 7.5% this year and 7.4% next year. Earnings per share are pegged to rise 11% this year and 12.5% next year.

British American smoke looks to spread in developing world

British American Tobacco is a mixed bag. The company is proactive at entering new international markets where there isn't as much of a concern for the health consequences of smoking cigarettes. Focusing more on these emerging areas than on countries where cigarettes are becoming obsolete will allow the firm to continue to bring in revenue.

Even people in these emerging markets are becoming more educated about the disastrous effects of smoking cigarettes, however. Many countries have recently banned cigarette advertising, and its just a matter of time before the developing world starts to realize the negative consequences of smoking. 

Analysts believe the company's revenue will drop 6.8% this year and gain 2.9% next year. Earnings per share are expected to rise 3% this year and 8% next year. The rise in expected earnings per share this year despite falling revenue is likely due to operating expense consolidation.

Buying cigarette firm shares is unethical

I'll never buy shares of tobacco companies, even if these companies are raking in tons of profits or can guarantee me a healthy return in my portfolio. The bottom line is that I don't want people to die in order for me to be able to buy a new car. Lorillard is the most attractive of these stocks, from both an ethical and profit perspective, but it would take the company to fully focus on e-cigarettes and do away with the tobacco segment for me to feel good about investing in the firm.

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This article was originally published as This Tobacco Company Is a Bit More Ethical than Otherson Fool.com

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