Wells Fargo Expects Tobacco Stocks To 'React Favorably' To Price Increases

Tobacco giants Altria Group Inc MO and Philip Morris International Inc. PM are raising prices on all of their cigarette brands, and investors should take this as a positive, according to Wells Fargo.

The Analyst

Wells Fargo's Bonnie Herzog maintains an Outperform rating on Altria's stock with an unchanged $65 price target.

The Thesis

Wells Fargo's industry contacts stated that both Altria and Philip Morris not only increased prices on all brands, but did so earlier than expected, Herzog said in a Wednesday note.

The analyst broke down the price hikes as follows:

• An 11-cents-per-pack increase, or 2-3-percent increase at retail, on Marlboro, L&M, Chesterfield and B&H Menthol Green.
• A 16-cents-per-pack bump on Parliament and Virginia Slims.
• A 31-cents-per-pack increase on everything else.

The price increases will become effective with shipments on or after Feb. 24, one month earlier than Altria's typical bi-annual price increase, Herzog said.

This demonstrates both Altria and Philip Morris' "significant" pricing power despite secular declines in volume tied to the popularity of e-cigarettes and the potential for the FDA to demand that tobacco companies lower their nicotine levels within a few years, the analyst said. 

Pricing power is also a "critical driver" of revenue and earnings growth and could generate upside to estimates, although Altria may decide instead to invest the incremental revenue in marketing to gain share, the analyst wrote, she said. 

Other tobacco companies are likely to follow suit and announce their own price increases in the days ahead, in Wells Fargo's view. 

Price Action

Altria shares were down 0.44 percent at $50.31 shortly before the close Thursday, while Philip Morris shares were up 0.32 percent at $85.26. 

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