With the precipitous drop in oil and gas prices that began last year, economists expected consumers’ savings at the pump to increase their spending habits.
This jump has yet to materialise in a big way, but one industry does seem to have benefited enormously from the fall in gas prices: tobacco.
“While we have maintained a very bullish view on the tobacco industry for much of the past 10 years, we must admit that the fundamental performance is outpacing even our most optimistic expectations,” RBC Capital analyst Nic Modi wrote in note to clients out Tuesday.
From 2012 to the end of the first half 2014, tobacco-industry volumes sold decreased on average 3.7% per quarter by RBC’s estimates, bottoming out with declines of 4.5% on three different occasions.
Over the past four quarters, however, volumes have rebounded dramatically, and in the past quarter volumes stayed flat.
The correlation in timing between the fall of gas prices and the increase in volumes, Modi said, is not a coincidence.
“The industry continued to see improving volume trends as the core tobacco consumer continues to benefit from the improving economic environment,” Modi wrote.
“Gas prices are down meaningfully year-over-year, supplementing the low-end consumer with more discretionary income.”
The pricing mix, indicative of what people are willing to spend on cigarettes and tobacco products, has also improved over the same time period. This means that not only are the companies moving more product, but they are making more money on it as well.
“Lower gas prices, higher employment and increasing consumer confidence is leading consumers to increase spending on premium tobacco brands, as noted by the strong performance of premium tobacco brands year-to-date,” Modi wrote.
Gas prices have not been the only good news for key tobacco consumers.
“Also, a combination of key metrics such as core tobacco unemployment, housing starts, and consumer confidence suggest that the tobacco consumer is enjoying a nice recovery, providing further support for tobacco fundamentals in the future,” Modi wrote.
He cited hospitality and construction as the two key sectors for tobacco companies in which unemployment was dropping.
Modi did conclude that volumes would most likely decline, especially because of weakness in emerging markets, but not as bad as in recent years, and he said the consumer fundamentals pointed to continued good news for the tobacco industry.
Business Insider Emails & Alerts
Site highlights each day to your inbox.