There is a global movement among the world’s governments to crack down on cigarette smoking. Investors should not be distracted by a legal win in recent news for U.S. tobacco companies: governments around the world are proposing and passing tobacco regulations.

This interplay between societal health issues and individual rights leads to compromises that challenge the outlook for tobacco company profits. In light of this, investors should demand low valuations. Unfortunately, many of these stocks are trading at too high a valuation to compensate investors for these risks.

Tobacco is Discretionary, Too

Tobacco products are viewed as recreational by some and additive by others. The truth is that some customers can curb their consumption in hard times. Thus, the idea that tobacco is an amazing recession-proof industry is faulty.

Philip Morris’ (PM) third quarter financial results demonstrated how tobacco products can be hit by an economic slowdown. Shipments of Philip Morris cigarettes to Argentina, Brazil, Colombia, Mexico and Canada fell 4.9% in the third quarter. Worse yet, shipments to European countries like Spain, Italy, France and Portugal declined eight percent.

Philip Morris CEO Louis Camilleri said, “Despite the difficult comparisons in the third-quarter, we remain confident that the fundamentals of our business are solid as a whole, which is testament to our progress, especially in our Asia and EEMA Regions.”

However, in contrast to these declining sales, Philip Morris has seen strong growth in Asian countries like Indonesia, Thailand and Vietnam. Sales in these Asian countries overwhelmed Japan’s declining sales for a slight 0.6% sales growth for Asia. The shipments of Philip Morris to the EEMA region (Middle East, Eastern Europe and Africa) rose 3%. To continue reading, click here.