Stocks: Goldman's Call Helps Boost Cigarette Shares -- WSJ
July 13 2019 - 3:02AM
Dow Jones News
By Michael Wursthorn
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 13, 2019).
Goldman Sachs' stock researchers say now is the time to buy
shares of tobacco companies Altria Group Inc. and Philip Morris
International Inc.
Even though fewer Americans smoke traditional cigarettes each
year, Goldman analyst Judy Hong says tobacco-stocks haven't looked
this good in a while, from valuations that are at a 10-year low to
the growth in electronic cigarettes and other smoking
alternatives.
Shares of Altria rose half a percentage point Friday, bringing
the maker of Marlboro cigarettes back into positive territory for
the year with a slim 0.2% gain, while Philip Morris added 0.8%.
If Goldman's right, those stocks are on track to climb higher
this year. Some of the regulatory concerns that had plagued the
companies last year are easing, with the exception of e-cigarettes,
Ms. Hong wrote, while valuations are among the most appealing in
the S&P 500, a factor that only strengthens if the Federal
Reserve follows through on cutting interest rates.
"Based on a historical relationship between tobacco valuation
and 10-year yield, we estimate the market is putting a 40% discount
to tobacco valuations relative to current 2% 10-year Treasury
yield," Ms. Hong wrote in a note to clients.
Shares of Altria trade at a forward-looking price/earnings ratio
of 11.4 times, while Philip Morris sits at 15.3 times, according to
FactSet. That is cheaper than the broader consumer-staple segment
in the S&P 500, which trades at nearly 20 times, and has been
getting a boost from the pullback in bond yields this year and
investors' belief that the economy is in the latter stages of the
economic cycle, analysts said.
But risks remain, including volatility in cigarette demand and
shipments, as well as the potential for greater government
regulation in the nascent e-cigarette market. Altria, for example,
bought a 35% stake in e-cigarette maker Juul earlier this year to
keep up with a changing market. But shares have struggled this year
amid scrutiny from regulators and cities, such as when San
Francisco decided last month to ban sales of electronic smoking
devices.
Long term, Goldman says Altria's relationship with Juul is a
plus, as e-cigarette sales grow to 18% of the total tobacco market
in 2021 from 11% last year.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
July 13, 2019 02:47 ET (06:47 GMT)
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