Even though fewer Americans smoke traditional cigarettes each year, Goldman analyst Judy Hong says tobacco-stocks haven’t looked this good in a while, from valuations that are at a 10-year low to the growth in electronic cigarettes and other smoking alternatives.
Shares of Altria rose 1% Friday, bringing the maker of Marlboro cigarettes back into positive territory for the year with a slim 0.8% gain, while Philip Morris added 0.3%.
If Goldman’s right, those stocks are on track to climb higher this year. Some of the regulatory concerns that had plagued the companies last year are easing, with the exception of e-cigarettes, Ms. Hong wrote, while valuations are among the most appealing in the S&P 500, a factor that only strengthens if the Federal Reserve follows through on 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,” Ms. Hong wrote in a note to clients.
Shares of Altria trade at a forward-looking price/earnings ratio of 11.5 times, while Philip Morris sits at 15.3 times, according to FactSet. That is cheaper than the broader consumer-staple segment in the S&P 500, which trades at nearly 20 times, and has been getting a boost from the pullback in bond yields this year and investors’ belief that the economy is in the latter stages of the economic cycle, analysts said.
But risks remain, including volatility in cigarette demand and shipments, as well as the potential for greater government regulation in the nascent e-cigarette market. Altria, for example, bought a 35% stake in e-cigarette maker Juul earlier this year to keep up with a changing market. But shares have struggled this year amid scrutiny from regulators and cities, such as when San Francisco decided last month to ban sales of electronic smoking devices.
Long term, Goldman says Altria’s relationship with Juul is a plus, as e-cigarette sales grow to 18% of the total tobacco market in 2021 from 11% last year.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
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