Tobacco Stocks Get Boost
NEW YORK (AP) - At a time when many stock market sectors are struggling with slim year-to-date gains, big tobacco companies are up comfortably by double-digits, boosted in part by a court decision that cleared away some of the legal uncertainty that has hounded them for years.
Shares of the world's biggest cigarette maker, Altria Group Inc., have risen more than 9 percent since July 5, the day before the Florida Supreme Court decertified a class action lawsuit and reversed a jury award of $145 billion, the largest in U.S. history.
Stock in Altria, along with No. 2 British American Tobacco PLC and Reynolds American Inc., were already rising steadily over the last year, and have done so even more sharply since the Florida decision. All three are trading near their 52-week highs, and year over year, the Dow Jones U.S. Tobacco Index is up more than 20 percent, led by UST Inc., Reynolds and Loews Corp.
In addition to the favorable court case, the cigarette makers have reported higher profits, even while there is legislation to ban smoking and numerous excise tax proposals pending in many states. And the companies haven't been hurt by news that Marriott International Inc. was becoming the second major hotel chain to impose a system-wide smoking ban on all its properties, following the lead of Westin, which is owned by Starwood Hotels & Resorts Inc.
Still, consumption is falling at a rate of about 2 percent per year as a growing number of smoking bans are enacted around the country. But the ability of the companies to offset those declines with price hikes appears intact, because higher prices don't seem to be eroding sales, analysts say.
"My point is, there is still pricing power for this industry," Citigroup analyst Bonnie Herzog said.
Analysts also note that the tobacco companies have reduced their promotional spending in the second quarter of the year over the first, helping profits grow. Herzog said 70 percent of manufacturers reported spending less on marketing in the most recent quarter, and she predicted that for Reynolds at least, this would translate to higher profitability for the rest of the year.
Altria investors are awaiting the company's break-up, beginning with the spin-off of its Kraft Foods unit. The spin-off is seen as a move to increase shareholder value, but it is not likely to happen until a Justice Department civil racketeering case is resolved. It's unclear when that might happen.
"The real upside will come from the official start of the break-up," Herzog said, adding that Altria stock was likely to trade in a tight range until investors know when the break-up will begin.
Shareholders of Reynolds, which makes Camel, Salem, Kool and Lucky Strike, have benefited from growing dividends, improving fundamentals and the acquisition in May of smokeless tobacco company Conwood.
Sales of smokeless tobacco are on the rise as consumers seek alternatives to cigarettes, and the Conwood acquisition is seen favorably by analysts. Altria, which owns the powerful Marlboro brand, is thought to be in good position to develop its own smokeless products internally, and has started early market testing of a smokeless product called Taboka in Indianapolis.
Within the last week, Herzog raised the target price for both Altria and Reynolds American stock. On July 25, she raised Altria to $94 from $80, and a day later, raised the target for Reynolds to $142 from $133.
