Bank of America Provides Color on Tobacco Industry

Bank of America provided color on the tobacco industry. In a research report published today, Bank of America commented on the Master Settlement Agreement payments. In the report, Bank of America states, "According to the Wall Street Journal, major cigarette manufacturers, including Altria, Reynolds American and Lorillard, may soon see a resolution to disputed Master Settlement Agreement (MSA) payments made to 46 states (nothing has been confirmed and this may not be close to imminent). While the mechanics and formulas of such disputes are complex, broadly tobacco companies have made some $81bn in total MSA payments since ‘98, of which near $7.1bn is under dispute (since ‘03) due to resulting market share losses/NPM adjustments1 and an estimated $3.3-$3.5bn is actually withheld in “dispute” accounts." Altria MO currently has a price target of $30 placed on its stock. The report names the downside risks to this assessment, "While the litigation environment has improved, it could ultimately deteriorate and have a more negative impact on MO's valuation than we have anticipated. Cigarette volumes are highly sensitive to higher taxes/prices, and may be further impacted by increased state and federal excise taxes, growing smoking restrictions, an increased regulatory environment, reduced consumption due to health factors or switching to alternative tobacco products... Any deterioration in the fundamentals of its US tobacco operations would have a negative impact, both on our EPS estimates and price objective. Upside risks to Bank of America's price target is "better than expected cost cutting, strong share gains in smokeless and stronger than expected net pricing." On Wednesday, Altria lost 0.48% of its value to close the day at $27.18. Its shares continued to slide in today's pre-market trading, falling 0.63% to $27.01. Lorillard LO currently has a price target of $124 placed on its stock. The report states, "We believe that LO's volume growth, double digit EPS growth, strong cash position, favorable dividend yield, low leverage ratio along with little to no commodity concerns in the current environment should support these levels, in our view. We continue to expect LO to pay out 70-75% of current- year earnings in the form of dividends." On Wednesday, Lorillard closed the day at 110.01. Reynolds American RAI currently has a price target of $40 placed on its stock. The report states, "While we see some flexibility for buy backs in the near term or potential EPS upside from pricing, its value-skewed cigarette portfolio may however make it vulnerable to share losses in an improved economic environment. Its strong position in the smokeless category allows it to participate in shifts across tobacco categories, though price competition is expected to remain heightened." On Wednesday, Reynolds closed the day at $37.71.