Goldman Cuts US Tobacco Sector to Neutral

Source from:  Reuters 12/12/2008

Dec 11 (Reuters) - Goldman Sachs downgraded U.S. tobacco sector to "neutral" from "attractive," saying fundamentals for tobacco companies are likely to weaken in 2009. The deteriorating macro environment and rising unemployment along with a likely federal cigarette excise tax increase will weigh on industry volume and profit next year, analyst Judy Hong said in a note dated Dec. 10. The analyst estimated a hike of 61 cents per pack in federal excise tax (FET) in March, which could lead to a 7 percent industry-wide volume decline next year. The rising unemployment rate could cause moderate downtrading and limit the companies' ability to take significant pricing on top of an FET-related price increase, Hong said. She cut her price targets and 2009 earnings estimates for U.S. tobacco stocks by about 9 percent on average. She cut her target on Lorillard Inc (LO.N: Cotización) by $8 to $71, and on Reynolds American Inc (RAI.N: Cotización) by $4 to $47. However, Hong expects moist smokeless tobacco category growth to remain healthy and premium brands' share decline to moderate due to a higher promotional spending. International tobacco fundamentals are also expected to remain relatively resilient, helped by healthy pricing and cost saves, while currency will be a drag, she said. She named Philip Morris International Inc (PM.N: Cotización) and Lorillard as her top picks, and said she views Lorillard as an attractive acquisition target over time. She rates both the stocks "buy". Enditem