5 Theses Behind Citi's Controversial Tobacco Call

The decline in U.S. cigarette volumes is likely to be slower than current consensus expectations, with decelerating e-vapor volumes helping conventional cigarettes, Citi’s Adam Spielman said in a report. He added that the tax and regulatory environment is significantly “less threatening” in the US.

“We prefer the U.S. domestic stocks,” Spielman commented, while recommending the stocks of Altria Group Inc MO and Reynolds American, Inc. RAI over that of Philip Morris International Inc. PM.

Related Link: Citi Not Convinced By Philip Morris' iQos

Controversial Calls

“We believe we are different mainly because we believe the domestic stocks (MO and RAI) should trade at a premium to international (PM),” Spielman noted. He mentioned five reasons for this call:

1. Earnings of Altria and Reynolds American are “inherently more predictable” than that of Philip Morris. This is because 100 percent of the latter’s earnings have exposure to currency fluctuations
2. The U.S. tax and regulatory environment for tobacco is much more favorable that that outside the US
3. U.S. volumes are expected to be better
4. The profit potential of Philip Morris’ iQos product remains unproven
5. The risk of negative surprises on litigation is currently higher for Philip Morris than it is for either Altria or Reynolds American

Ratings And Price Targets

The analyst has Buy ratings on Altria and Reynolds American, and a Neutral rating on Philip Morris. The price target for Altria is at $72, for Reynolds American at $57 and for Philip Morris at $106. “We have buys on both the domestic stocks, MO and RAI, but RAI is our preferred name,” Spielman commented.

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