My stock pick for 2023 is Scandinavian Tobacco Group - now let me explain why.
This investment pitch focuses on a value style of investing. My thesis for STG relies on both valuation and my macro outlook.
Valuation metrics:
FY 2021
- FCF yield: 10.1%
- Dividend yield: 4.7%
- Price/Cash Flow: 9.9
- P/E: 9.1
- EV/EBITDA: 7.3
Consensus Estimates FY 22:
- FCF yield: 10.2%
- Dividend yield: 6.3%
- Price/Cash flow: 8.0
- P/E: 7.7
- EV/EBITDA: 6.8
Scandinavian Tobacco Group currently trades at a high free cash flow yield, with consensus estimates for 2022 of 10.2%, which reflects both the company’s strong cash flow generation and also low relative price to its cash flows.
The dividend yield is also strong, estimated at 6.3% for 2022E. A dividend yield of 6.3% is competitive with European high-yield bonds, as per ICE BofA Euro High Yield Index Effective Yield, and in my opinion, holds less risk with greater inflation resistance.
STG’s earnings multiples are also attractive, with a forward P/E of 7.7, compared to the C25, which has a forward P/E of 12.9.
Scandinavian Tobacco Group can also outperform in a recessionary environment because smoking is addictive. STG is the world’s leading cigar company with a large moat and a portfolio of high-quality brands, which its consumers trust and will not pivot away from. The addictive nature of smoking also means that consumption is robust during a recession and with a low substitution effect.
In addition, strong branding and the addictive quality of its products means that STG also has strong pricing power, which can allow it to outperform the market in an inflationary environment. Its pricing power and captive audience mean that if inflation returns during 2023, STG will outperform any comparative bond, offering a similar yield.
Overall, I think STG is misvalued because the cigar business is a declining industry. However, the company has demonstrated a continued ability to grow revenues while also realising efficiency improvement to grow margins.
However, there are also risks associated with an investment, particularly from the regulation perspective. Laws increasing regulation on tobacco products are subject to intense scrutiny and could change, impacting STG’s revenues. However, I see this risk as low in the current environment.
Disclaimer: This is not investment advice, and I do not currently own shares in STG / 13:37 22.12.2022
Helt kort går konkurrencen ud på, at man skal udvælge vinderaktien for 2023 inden d. 31. december. Konkurrencen vil blive afgjort af stemmer efterfølgende fra alle på forummet, så det handler om, at komme med den bedste argumentation.
