Bernstein Initiates On Tobacco Stocks: Philip Morris 'Leads The Way In The New Nicotine World'

Tobacco stocks are facing an uphill battle when it comes to regulation and public perception, but one Wall Street analyst says tobacco companies have a long track record of success for investors.

The Analyst

Bernstein analyst Callum Elliott has initiated coverage of Philip Morris International Inc. PM and Imperial Tobacco Group IMBBY with Outperform ratings. Elliott also initiated coverage of British American Tobacco PLC BTI, Altria Group Inc MO and Swedish Match AB SWMAF with Market Perform ratings.

The Thesis

Altria, British American and Imperial stocks have generated an average annual total return of between 13 percent and 15 percent since 1998, Elliot said, and declines in volume have been offset by pricing leverage. Now that the world of nicotine is transitioning away from tobacco, the companies willing to embrace the transition will be best-positioned in the long-term.

At this point, Elliott feels Philip Morris is the only company to welcome the innovator’s dilemma.

“The good news is that PMI has real expertise, consumer know-how and financial firepower that, we think, should allow them to prosper in the New Nicotine World,” Elliott wrote in a note.

Philip Morris has already made a $5-billion investment in developing a brand new portfolio of next-generation nicotine products that generated a combined $3.6 billion in high-growth revenue in 2017. By 2019, Bernstein estimates these innovative products will make up nearly a fourth (24 percent) of Philip Morris’ total revenue.

As other tobacco companies follow suit in putting together sustainable business plans and rolling out new products, the potential winners and losers in the space will become more clear to investors.

Price Action

Here’s how the five stocks mentioned reacted Tuesday:

• Swedish Match was up 1.3 percent.
• Altria was down 1 percent.
• British American was down 3.3 percent.
• Imperial Tobacco was down 1.6 percent.
• Philip Morris was flat.

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