Reynolds is Nomura's Top Pick From Tobacco Space, Philip Morris Upgraded

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On Wednesday, Nomura initiated coverage on tobacco manufacturers Reynolds RAI, Altria MO and Lorillard LO. Analyst David Hayes also upgraded shares of Philip Morris PM from Reduce to Neutral.

Hayes views the sector overall as “expensive...trading at a next 12-month P/E of 15x, which is about 9% premium to its three-year average.”

Over the next 12 months, the analyst sees a “risk of de-rating to an average of about 14x.”

Nomura's preferred pick is Reynolds on “superior growth relative to peers (3.5% above consensus 2015E EPS; five-year adjusted EBIT CAGR of 6.0% vs peers at 2.9%) and an increasing possibility of a close relationship with BAT.” Hayes initiated a Buy rating and $66 price target. Shares are up 1.2 percent.

Altria was initiated at Neutral with a $40 price target. Hayes' 2015 earnings per share estimate is 3 percent below consensus estimates and sees five-year-adjusted EBIT CAGR of 2.8 percent. Shares are up 0.74 percent.

Lorillard was initiated at Reduce with a $54 price target. Hayes has a five-year-adjusted EBIT CAGR of 3 percent. The company trades at a premium to competitors, “inflated in part by...low credibility acquisition expectations.” Shares are down 2.2 percent.

The upgrade of Philip Morris was due to concerns of “Indonesian slowdown, Japan competition/price levels, persistent Philippines profit erosion, margin pressure from need to reinvest, full treatment of forex impacts, and contracting buy-back scale,” but those concerns are now in the rear view mirror, according to Hayes. The analyst has a $73.60 price target. Shares are down 0.2 percent.

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Posted In: Analyst ColorAnalyst RatingsDavid HayesNomura
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