Goldman On Tobacco: Favors Reynolds Over Philip Morris, Altria

Tobacco fundamentals remain strong, with several tailwinds into 1Q earnings, said Goldman Sachs’ Judy E. Hong. She explained that the tailwinds include:

1. 10-year yield continues to be low
2. US cigarette volumes continue to be above-trend
3. A softer US dollar “providing an abating headwind”

Reynolds American

Analyst Judy Hong reiterated a Buy rating for Reynolds American, Inc. RAI, with a price target of $54. The 1Q16 EPS estimate is maintained at $0.50, which is in-line with consensus.

Although expectations have been revised upwards over recent months, the company is likely to continue to benefit from market share gains, healthy total price and price mix, and the realization of synergies, estimated at $20mn for 1Q. Hong wrote further that she expects the company to record “outsized EPS growth in 2016,” estimated at 19 percent.

Philip Morris

The analyst reiterated a Neutral rating for Philip Morris International Inc. PM, while raising the price target from $97 to $100. The company’s shares have climbed 15.4 percent YTD, versus a 0.7 percent gain in the S&P, and already reflect a more favorable currency impact.

Hong expects forex to be a significant tailwind for the company into 1Q, and guidance to be raised. The EPS estimate for 1Q16 has been raised from $1.11 to $1.12, ahead of the consensus expectation of $1.10. The EPS estimates for FY16, FY17 and FY18 have been raised from $4.47 to $4.56, from $4.86 to $5.00 and from $5.28 to $5.43, respectively.

“We do expect 2016 guidance to increase on better FX, driven by improvement since 1/31/16 in the RUB (+14%), JPY (+12%), EUR (+5%) and IDR (+5%). Fundamental trend remains stable…EU and Indonesia trends remain solid, while Russia and Japan could show softer trend,” the Goldman Sachs report stated.

Altria

Hong maintained a Neutral rating for Altria Group Inc MO, with a price target of $63. The EPS estimates for 1Q16 and 2016 are maintained at $0.69 and $3.07, respectively.

“While MO should also benefit from strong industry trend, it will likely reinvest near-term upside from productivity savings ($300mn through 2017), and we do not envision large upward guidance revisions ($3.00-$3.05) this early in 2016,” the analyst wrote.