For all the regulation, tax increases, and bad PR, the tobacco industry is still monstrous — and as such, is still interesting to investors.
Like any other industry, analysts try to predict where it’s headed. But because of tobacco’s negative cultural cachet (and carcinogens), commentary can feel a little uncomfortable.
Take this note from RBC, which argues that the 65% bump in housing starts since December 2010 will help out the tobacco industry.
What does the housing recovery have to do with tobacco?
“With housing starts on the rise, construction workers (a leading group of tobacco consumers) are entering the workforce and have incremental income to spend on tobacco,” writes RBC.
More construction workers, who are typically lower income and thus more likely to smoke, have money to buy cigarettes.
Or how about falling gas prices, another big market trend in 2013?
“Gasoline prices have fallen throughout 2013, down -23% from February highs,” writes RBC. “With lower gasoline prices, tobacco consumers have relatively more money left in their pockets after filling up at the pump to buy cigarettes and other tobacco products.”
Again, lower income smokers are the ones who are more likely to have to make the economic choice between gasoline and cigarettes.
It’s not all roses for Big Tobacco. “An offset to the positive macro data points is the reduction of food stamp benefit,” according to RBC. “And while food stamps have not been used to purchase tobacco, we estimate consumers will have $US10 less per month of ‘purchasing power,’ which we believe will have some marginal negative impact on tobacco consumption.”