Top 2010 Tobacco Tips: PMI, Altria, Lorillard

Source from:  TheStreet 01/12/2010

In a note to investors Monday, Stifel Nicolaus announced its top tobacco picks for 2010, including Philip Morris International(PM Quote), Altria(MO Quote) and Lorillard(LO Quote) -- which come amid expectations that improving economic conditions around the globe will support stronger overall profit growth for the industry in the coming year. Stifel Nicolaus particularly favors Philip Morris in its tobacco coverage. PMI's volumes may be down, the company said, but its pricing is up strongly and helping to generate top-tier EPS growth, the analysts write. Also to Philip Morris' benefit in 2010 is the improved foreign exchange environment, which will likely result in a stronger rate of reported growth at PMI, Stifel Nicolaus writes. Given current exchange rates, Stifel Nicolaus provides an earnings estimate for PMI of $3.77 per share, up 15% from the prior year. The analysts write that PMI's valuation remains at a discount to the S&P 500 and consumer staples and provides solid upside potential to Stifel's $56 price target for PMI. Despite the continued FDA regulatory challenges, tax increases and smoking bans that continue to plague the U.S. tobacco industry, Stifel Nicolaus has increased its earnings estimate for Lorillard in 2010 by 8 cents, to $6.27, as Lorillard benefits from share repurchase activity and stronger margin assumptions for the business. However, the analysts still recognize a limited upside potential to its $83 price target for Lorillard. Stifel believes that Altria continues to warrant a buy rating given its relatively strong fundamentals. The analysts have increased their price target for Altria to $22, up $1. The Stifel analysts don't see any acquisition activity in the U.S. tobacco industry in 2010, given that the U.S. market is heavily concentrated with the three key cigarette manufacturers holding essentially 90% of the market: Altria, Reynolds(RAI Quote), and Lorillard. Enditem