Sector Snap: Tobacco Slides

Source from:  Associated Press 12/16/2008

Shares of tobacco companies slipped Monday after the Supreme Court decided to allow smokers to sue cigarette makers for the way they promote "light" and "low tar" brands. The decline in the stock prices came even after a JPMorgan analyst said he was cautiously optimistic about the ability of U.S. tobacco companies to return cash to shareholders and keep profits from sharply sliding when taxes rise in 2009. The analyst, Erik Bloomquist, upgraded shares of Altria Group (nyse: MO - news - people ) Inc. to "Overweight" from "Neutral" and downgraded shares of Lorillard Inc. to "Neutral" from "Overweight," saying Altria will likely generate more cash returns. In a note to investors, Bloomquist said he is more optimistic about the sector even though both the federal excise tax and the state excise tax are set to rise next year. He estimated that national average retail prices will jump about 14 percent year-over-year in 2009 due to the higher taxes and a per-pack payment from legal settlements. Assuming the taxes are fully passed on to the consumer, he said industry volume during the year could drop by 4 percent. But, he said, manufacturer price increases will likely offset some of the impact of those volume declines. He estimated that cigarette makers' operating profit growth will likely be either flat to down by low single-digits in 2009. Earnings-per-share growth, meanwhile, may be boosted by share buybacks. Bloomquist also noted that most companies plan to continue buying back shares and several, including Reynolds American (nyse: RAI - news - people ) Inc. and Altria, have cost savings programs in place that can also safeguard profits. He said he expects Altria, in particular, to return "significant amounts of cash to shareholders." But the surprise 5-4 Supreme Court ruling may have spooked investors, causing stock prices to fall. Altria shares fell 31 cents to $15.03 in midday trading while shares of Lorillard dropped $2.75, or 4.7 percent, to $56.05. Shares of Reynolds American slipped 98 cents to $39.57.