VGR - Vector Group: Strong Trends And Upside Potential

Summary

• The company continues to maintain a steady pace of revenue growth.
• Despite macro headwinds, operating margin remains stable.
• In accordance with my DCF model, the company continues to trade below its fair level and retains upside potential.

Introduction

Vector Group ( VGR ) shares have risen 3.2% YTD. Despite the growth in interest rates, the decline in consumer confidence and the real disposable income of the population, the company continues to demonstrate stable operating and financial results. First, the company operates in the tobacco sector, where it is easier for businesses to pass on rising cost inflation to the end consumer. In addition, the demand for the company's products remains stable even in the face of macro and geopolitical tensions.

Projections

The company released mixed Q3 financial results on November 1, so I would like to share my assumptions for the next periods.

Revenue growth: I believe the company is able to sustain revenue growth that will outpace inflation due to the possibility of higher prices, as well as through the integration of new brands.

Gross margin: I believe that the gross margin will remain at a stable level of about 30% until 2026, as the company, as I wrote above, can increase prices for the end consumer. In addition, economies of scale and the size of the business make it possible to effectively work with suppliers to control costs.

SGA: I model SGA spending at a steady 9% (% of revenue) until the end of 2026. I suppose we can focus on historical data here. In addition, the company operates in a conservative and stable segment, where management has the ability to effectively manage costs based on the expected level of sales.

Quarterly projections

Yearly projections

Valuation

To evaluate the Vector Group, I prefer to use the DCF method because, in my personal opinion, this method is the most appropriate for companies in the non-cyclical sector.

First, we can rely on historical data to most accurately predict future trends.

Secondly, the company operates in a stable and understandable market, which makes the process of modeling future cash flows easier.

Thirdly, based on statistical data, management forecasts and independent news agencies, we may make additional input data for future periods.

For evaluation, I use the following data:

WACC: 11.6%

Terminal growth rate: 3%

In addition, I have calculated current and target P/E and P/S multiples based on my personal forecasts. You can see the results of my calculations in the table below.

Drivers

Macro: The recovery of consumer confidence and the growth of real disposable income of the population are additional positive factors for the growth of business revenue.

Margin: The possibility of higher end-user prices and lower operating cost inflation could support the company's gross margin. In addition, lower wage inflation could support the business's operating margin.

Risks

Macro: Growing geopolitical tensions could put pressure on revenue growth and margins due to rising freight costs.

Margin: Continued growth in inflation may have a negative impact on the dynamics of the gross margin and operating margin due to rising costs for ingredients and wages.

Competition: Increasing competition and the need for additional investment in marketing can be a negative factor for business profitability.

Conclusion

So the target price for the stock, according to my DCF model, is $14.5 with an upside potential of 15%. I believe that the company is able to continue to show a stable rate of revenue growth due to the ability to pass on price increases to the end consumer. In addition, operating in a stable sector allows us to effectively manage operating costs to maintain a stable level of operating profitability.

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