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Wednesday, March 27, 2019 11:38:43 AM
By: Barron's | March 26, 2019
Altria stock was rising on Tuesday, after an analyst argued that the headwinds facing tobacco stocks aren’t as worrisome as some think.
The back story. Tobacco stocks suffered in 2018, largely because of e-cigarettes, which have weighed on volumes for their analog counterparts. Vaping may not actually be helpful for those wanting to quit tobacco, but e-cigarettes continue to take market share from traditional players—as well as bring unwanted attention to cigarette flavoring in general. Altria invested in Juul Labs late last year. And while not everyone liked the deal, it at least gave the company exposure to the segment, as the Food & Drug Administration still hasn’t approved Philip Morris International ’s (PM) own vaping device.
This year has been kinder to many 2018 laggards, and Altria stock (MO) is no exception. While the stock is still down almost 9% in the trailing 12-month period, it has risen 15% in 2019. Skeptics remain, but some investors have been heartened by upbeat earnings from the company, along with the value of its cannabis investment with Cronos (CRON), hopes that the government may back off recent regulatory proposals, and ongoing analyst optimism. Altria stock also has a juicy dividend yield.
What’s new. On Tuesday, RBC Capital Markets analyst Nik Modi argued that while bears point to FDA threats and falling cigarette volumes, there’s still reason to be upbeat about Altria’s prospects. He reiterated an Overweight rating and $68 price target on the shares, writing that “it takes a long time for the FDA to get things done (all before industry litigation),” which other analysts note will likely be fierce. Thus, he doesn’t see any near-term risk to big tobacco from issues like a menthol ban.
Altria stock was up about 1% in Tuesday morning trading, to about $57 per share, in line with the broader S&P 500.
Looking ahead. Modi wrote that worries about cigarette volumes and other regulatory risks have been overstated, and the company has already reset expectations following recent earnings reports. As Barron’s has noted previously, despite all the negative headlines, Altria has been able to return fairly steady earnings, and continues to raise prices against falling volumes. Disruption remains a key driver in the space, and not all of tobacco’s problems look set to go up in smoke. But investor sentiment on the shares appear to have turned a corner from the darker days of 2018.
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