Goldman Sachs is downbeat on the third-quarter earnings of tobacco companies, with the firm stating the third quarter is
unlikely to reverse recent underperformance in the sector. The firm is below-consensus on Philip Morris International Inc.
(NYSE: PM) and Reynolds American, Inc. (NYSE: RAI) but above consensus on Altria Group Inc (NYSE: MO).
Analyst Judy Hong expects U.S. cigarette volumes to continue to revert to the historical rates of decline. The analyst also
believes the recent uptick in the 10-year yield and unwinding of low/minimum volatility ETFs would drive rotation out of the
tobacco stocks.
Below-Consensus On Philip Morris To Reflect Phasing
Goldman sees third-quarter earnings per share of $1.21, three cents below the consensus, reflecting weaker volume and continued
solid price/mix momentum. While noting that the company is unlikely to alter its 2016 guidance, the firm said it is three cents
above the consensus.
Related Link: Compounding,
Cigarettes And Savings: How Quitting Smoking Can Save Your Retirement's Life
Lower Margin Forecast Leads To Below-Consensus View For Reynolds American
Although market share gains are seen for Reynolds American, Goldman expects lower EBIT margin and accordingly, remains
below-consensus for the third quarter. The firm estimates 0.5 percent volume growth and 16 percent earnings per share growth for
the third quarter, thanks to price and cost synergies. The firm expects the company to tighten its 2016 guidance to $2.28–$2.34
compared to its estimate of $2.32.
Altria: Sole Exception
Goldman is one cent above consensus for Altria, as it expects 7 percent earnings per share growth on higher pricing that is
expected to offset volume declines. The firm also sees strong smokeless EBIT growth.
The firm updated its 2016 and 2017 earnings per share estimate for Altria to $3.01 and $3.33, while the company had recently
updated its 2016 guidance to $2.98–$3.04. Goldman lowered its 12-month price target for Altria to $68 from $69 on peer
multiples.
Fundamentals Solid
Nevertheless, Goldman believes tobacco fundamentals are solid and forecasts double-digit earnings per share growth for all the
three companies in 2017. The firm rates Philip Morris a Buy, given the healthy global fundamentals, improving forex and the
emergence of a product cycle story in NGPs with iQos leadership.
Related Link: E-Cigarettes
Benefit Public Health, The Royal College Of Physicians In The UK Says
Ratings And Price Targets
- Altria: Neutral, $68 Price Target.
- Philip Morris: Buy, $116 Price Target.
- Reynolds American: Neutral, $53 Price Target.
At the time of writing, Philip Morris was down 0.02 percent at $96.26, Reynolds American was down 0.11 percent at $47.39 and
Altria was down 0.21 percent at $62.56.
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Latest Ratings for MO
Date |
Firm |
Action |
From |
To |
Sep 2016 |
Jefferies |
Initiates Coverage on |
|
Hold |
Sep 2016 |
CLSA |
Maintains |
|
Outperform |
Sep 2016 |
Citigroup |
Initiates Coverage on |
|
Buy |
View More Analyst Ratings for
MO
View the Latest Analyst Ratings
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