3 Tobacco Stocks Goldman Sachs Thinks Are Unlikely To See Positive Q3 Results

Goldman Sachs is downbeat on the third-quarter earnings of tobacco companies, with the firm stating the third quarter is unlikely to reverse recent underperformance in the sector. The firm is below-consensus on Philip Morris International Inc. PM and Reynolds American, Inc. RAI but above consensus on Altria Group Inc MO.

Analyst Judy Hong expects U.S. cigarette volumes to continue to revert to the historical rates of decline. The analyst also believes the recent uptick in the 10-year yield and unwinding of low/minimum volatility ETFs would drive rotation out of the tobacco stocks.

Below-Consensus On Philip Morris To Reflect Phasing

Goldman sees third-quarter earnings per share of $1.21, three cents below the consensus, reflecting weaker volume and continued solid price/mix momentum. While noting that the company is unlikely to alter its 2016 guidance, the firm said it is three cents above the consensus.

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Lower Margin Forecast Leads To Below-Consensus View For Reynolds American

Although market share gains are seen for Reynolds American, Goldman expects lower EBIT margin and accordingly, remains below-consensus for the third quarter. The firm estimates 0.5 percent volume growth and 16 percent earnings per share growth for the third quarter, thanks to price and cost synergies. The firm expects the company to tighten its 2016 guidance to $2.28–$2.34 compared to its estimate of $2.32.

Altria: Sole Exception

Goldman is one cent above consensus for Altria, as it expects 7 percent earnings per share growth on higher pricing that is expected to offset volume declines. The firm also sees strong smokeless EBIT growth.

The firm updated its 2016 and 2017 earnings per share estimate for Altria to $3.01 and $3.33, while the company had recently updated its 2016 guidance to $2.98–$3.04. Goldman lowered its 12-month price target for Altria to $68 from $69 on peer multiples.

Fundamentals Solid

Nevertheless, Goldman believes tobacco fundamentals are solid and forecasts double-digit earnings per share growth for all the three companies in 2017. The firm rates Philip Morris a Buy, given the healthy global fundamentals, improving forex and the emergence of a product cycle story in NGPs with iQos leadership.

Related Link: E-Cigarettes Benefit Public Health, The Royal College Of Physicians In The UK Says

Ratings And Price Targets

• Altria: Neutral, $68 Price Target.
• Philip Morris: Buy, $116 Price Target.
• Reynolds American: Neutral, $53 Price Target.

At the time of writing, Philip Morris was down 0.02 percent at $96.26, Reynolds American was down 0.11 percent at $47.39 and Altria was down 0.21 percent at $62.56.

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