Stifel's Buys: Philip Morris, Altria, Lorillard

Source from:  TheStreet 01/20/2010

Philip Morris International (PM Quote) continues to be Stifel Nicolaus' top pick in the tobacco sector, on the basis of its strong fundamentals and position to benefit from improved foreign exchange rates, the analyst firm said today. "We believe [Philip Morris International] should be valued at a premium to its international tobacco peer group in light of what we view as its above average volume growth opportunities, premium portfolio, size and scale advantages, and significant free cash flow generation," the analysts write in a note to investors. Stifel Nicolaus has a buy rating for Philip Morris International at a $56 price target. The analysts estimate a 15-cent benefit to Philip Morris International's earnings per share in 2010 from improved foreign exchange rates. The benefit suggests roughly 10% underlying EPS growth and 15% reported EPS growth. The foreign exchange benefit adds "nicely to our strong underlying growth assumption in 2010," the analysts write. They add that Philip Morris International's operations in China present a compelling and unique growth opportunity over the long run. The Stifel Nicolaus analysts recognize that investors continue to fret over the trade-down to cheaper brands and weaker consumption in the emerging markets. However, they point out that this situation is occurring alongside strong and improving price realization as well as increased marketing resources. Stifel Nicolaus sees strong profit conditions for Philip Morris International in Western Europe from a pricing perspective and continued strong growth in Eastern Europe and Latin America. Stifel Nicolaus analysts believe that 2010 will once again be a quiet year for M&A in the global tobacco market. In the report, the analysts said they aren't surprised about the dearth of M&A activity in 2009 now that the top four manufacturers control upwards of 70% of global volume, excluding China. Stifel Nicolaus believes that U.S. tobacco fundamentals are currently in good shape as strong prices continue to more than offset the negative effect of weak volumes across the industry. They add that tobacco litigation is a low threat in the U.S. today. Stifel Nicolaus also has a buy rating for Altria(MO Quote), with a $22 price target, and a buy rating for Lorillard(LO Quote), with an $83 price target. Enditem