Goldman Sachs just doubled down on one of America’s top tobacco stocks, despite the fact that the industry has been in somewhat of a struggle for the past decade.
Altria Group (NYSE: MO) shot up on Friday when the investment bank argued that the company, alongside the tobacco industry, have become too cheap and that shares would gain some value in a correction.
Tobacco stocks overall have been struggling over the past year, with most analysts and investors placing their hopes towards a new generation of cigarette-free products. However, despite the efforts of many of these companies to diversify, shareholders of some of these companies haven’t been impressed.
Altria is one of those major companies, as despite recent investments in the vaping sector, such as Juul Labs, as well as other ventures into the cannabis space through Cronos Group (NASDAQ: CRON), shares of the company have struggled to gain value. Altria recently saw a major dip in its price on May after data showed a larger-than-expected drop in cigarette sales, despite owning the lead cigarette brand in the U.S., Marlboros, which has an impressive 40 percent market share.
However, Goldman Sachs analyst Judy Hong is now arguing that the stock is undervalued, raising her rating on the company from a “neutral” to a “buy,” while keeping her $59 price target unchanged. As of Friday’s closing price, this implies Altria has a 20 percent upside within the next few months.
She argued that worries about cigarette volumes would ease up in the second half of 2019, while Altria’s decision to raise the price of their products on almost all of its brands are expected to offset this decline in sales. Hong also wrote that valuations for tobacco companies haven’t reached such a low, attractive point for a long time, something that will only strengthen if the Federal Reserve follows through on further cutting interest rates.
“Based on a historical relationship between tobacco valuation and 10-year yield, we estimate the market is putting a 40% discount to tobacco valuations relative to current 2% 10-year Treasury yield,” Hong wrote in a note to clients. She added that she projects earnings per share growth of 6 to 7 percent in 2019 and 2020, and that the stock will “outperform as cigarette fundamentals hold up better than feared and Altria benefits from increased exposure to Next Generation Tobacco Products over the longer term.”
Shares of the tobacco-giant were up around 0.75 percent in response to the news on Friday. Over the past 12 months, shares of Altria have fallen by 16 percent, while over the past few months since the beginning of 2019, the stock fell by 0.3 percent.
Altria Company Profile
Altria comprises Philip Morris USA, U.S. Smokeless Tobacco, John Middleton, Ste. Michelle Wine Estates, Nu Mark, and Philip Morris Capital. It holds a 10.2% interest in the world’s largest brewer, Anheuser-Busch InBev.
Through its tobacco subsidiaries, Altria holds the leading position in cigarettes and smokeless tobacco in the United States and the number-two spot in machine-made cigars. The company’s Marlboro brand is the leading cigarette brand in the U.S. with a 40% share. – Warrior Trading News
