Fitch Sees Stability for Tobacco Companies in 2009

Source from:  AP 11/19/2008

NEW YORK (AP) -- The threat of a higher federal excise tax and greater regulation are not likely to hurt the ratings of U.S. tobacco makers next year, Fitch Ratings analysts told investors on Tuesday. Higher taxes would further dampen demand for cigarettes, though. Sales volume has been falling by about 3 percent to 4 percent a year in the U.S. But the Fitch analysts believe U.S. cigarette makers such as Philiip Morris USA, Reynolds American Inc., and Lorillard would be relatively stable regardless. "This outlook is supported by the companies' significant liquidity positions and by their ability to continue to generate sizeable free cash flow as a result of their high operating margins," analyst Wesley Moultrie II wrote in a note. Moultrie said anlaysts expect an expansion of the State Children's Health Insurance Program, which could lead to a hike in the federal excise tax. Another hurdle for some cigarette makers is the probable success of a bill to give the Food and Drug Administration the authority to regulate tobacco. Analysts say a bigger Democratic majority in both houses of Congress make the passage of such a bill more likely. Still, tobacco companies are seen as a defensive holding in a tumultuous market since consumers tend to buy cigarettes even when they cut back on other purchases. Lorillard Chief Executive Martin Orlowsky on Tuesday reiterated the company's expectation for revenue growth based on price increases. He said the company would report 5 percent to 7 percent growth of earnings per share. Further, Orlowsky said he didn't see any evidence that Lorillard was losing any of its cigarette busine$1.22, or 3.2ss to smokeless tobacco products such as moist snuff, chewing tobacco and teabag-like snus pouches. Lorillard's bigger rivals, Altria Group-owned Philip Morris USA, and Reynolds American Inc. are aggressively pursuing smokeless products in the hope of finding new revenue streams as cigarettes decline. Speaking at the same conference, Philip Morris International Chief Executive Louis Camilleri expressed confidence in the company's earning potential going forward. He said earnings per share would grow by 10 percent to 12 percent next year as consumption held up in emerging markets outside the U.S. "We are very confident we can meet our long-term targets next year and beyond, in terms of growth," Camilleri said. "We are not witnessing any undue shift in consumer behavior. In one or two places, uptrading may have slowed down a bit." Shares of Lorillard fell 18 cents to $61 in afternoon trading while Altria shares rose 14 cents to $16.33. Reynolds American declined 8 cents to $44.09 as Philip Morris International fell $1.24, or 3.2%, to $37.11. Enditem