Morgan Stanley Upgrades Altria On Better Price

The cigarette business isn’t exactly smoking these days.

And as investors have moved away from Big Tobacco, lowering share prices, one of the biggest cigarette companies has also broadened its product line beyond traditional cigarettes. And that makes the cheaper shares of Altria Group Inc. MO worth a new look, Morgan Stanley said Friday in a note.

The Analyst

Morgan Stanley’s Pamela Kaufman upgraded Altria from Underweight to Equal-weight with a $44 price target.

The Thesis

Kaufman acknowledged things still don’t look great long-term for the tobacco industry.

But investors have known that for some years, and Altria has underperformed the broader market considerably, with its shares down 5.7% year to date while the S&P 500 is up more than 16%. Altria now trades at a 48% discount to the broader Consumer Staples sector.

“Tactically, we see a more balanced risk-reward near term, but we remain cautious on fundamentals,” Kaufman wrote in the note.

Kaufman had downgraded Altria back in January, but the risk to fundamentals now looks to be priced in.

“We expect US cigarette volumes to remain under pressure … but acknowledge that this has become part of the consensus view on the stock,” Kaufman wrote.

Meanwhile, Altria has hedged on its core business. It now has a 35% stake in one of the biggest threats to traditional cigarettes, the e-cigarette company JUUL, and an 80% stake in on! nicotine pouches. It also has dipped into the cannabis market, with a 45% stake in Cronos Group Inc CRON.

Altria may be betting on its own demise with the investments, but Kaufman sees it as good strategy.

“We recognize that MO will be facilitating cannibalization of its highly profitable cigarette business through its sales support to JUUL,” she wrote. “Longer-term, however, JUUL's favorable demographic skew offers an offset to MO's aging core cigarette customer base.”

Price Action

Altria shares were up 0.71% to $46.92 at time of publication.

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