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Sunday, 04/14/2019 9:32:41 AM

Sunday, April 14, 2019 9:32:41 AM

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Philip Morris Gains Traction as Analysts See Good News for Tobacco Stocks
By: Barron's | April 12, 2019

Tobacco stocks are finally hot again, following a dismal 2018, and analysts see some more good news on the horizon, especially for Philip Morris International (PM).

The Back Story. Both Altria (MO) and Philip Morris have notched double-digit gains in 2019, making up some ground after deep losses last year. The stocks have benefited from robust earnings this year, offer juicy yields, and enjoy analyst optimism—especially when it comes to Altria’s cannabis investment. Still, the threat of e-cigarettes hasn’t gone away. Vaping is taking market share from traditional products (even amid an investigation into a potential link to seizures and reports that they haven’t shown to be good smoking-cessation aides). Also, with so many teenagers and young people taking up the habit, the Food & Drug Administration is looking to crack down on cigarette flavoring across the board. Nor has Altria’s investment in Juul Labs always been a boon for the stock.

What’s New. Earlier this week, the nonprofit tobacco consortium TMA held a conference at which the FDA’s director of the Center for Tobacco Products, Mitch Zeller, was the keynote speaker. This was his first major public appearance since agency Commissioner Scott Gottliebannounced he was stepping down, and Zeller’s comments sparked hopes that the government might take a less-strict stance on the tobacco players.

Cowen & Co.’s Vivien Azer attended the conference, and writes that the “most significant announcement…was FDA Office of Science Director Matt Holman's comment that the agency plans to take action on the [Philip Morris’s vaping device] iQOS premarket tobacco application (PMTA) this year.” Recall that while other e-cigarette products have proliferated in the U.S., Philip Morris has been able to sell its device only overseas, as its FDA application has languished for years without a decision. Holman said other applications would also see action this year, but didn’t offer any indication about their potential success or failure. Still, after such a long wait, a “resolution is a welcome development,” Azer writes, even if Philip Morris’s licensing benefit will be modest.

Looking Ahead. Azer is Neutral on Philip Morris, but Stifel’s Christopher Growe reiterated a Buy rating and $97 price target on the stock. He thinks 2019 will finally be the year iQOS will get U.S. approval. He writes that while there are still headwinds for the industry, like the declining cigarette volumes, pricing remains robust and there are other offsetting factors. He doesn’t think the FDA will ban menthol this year, while operating volumes look poised to improve, and stock valuations look cheap. He also has a Buy rating and $59 price target on Altria, as he likes its earnings growth outlook and pricing power.

Altria was up 0.6% to $56.33 in Friday morning trading, while Philip Morris was 0.2% higher to $85.68.

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