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What’s Driving Tobacco Companies’ Stock Prices in 2017?

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Mar. 30 2017, Published 11:26 a.m. ET

Tobacco companies

Since most 4Q16 earnings have been released, it’s time to analyze and compare tobacco companies. In this series, we’ll focus on the 4Q16 performances of Altria Group (MO), Philip Morris International (PM), and Reynolds American (RAI).

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Altria’s stock performance

In 4Q16, Altria posted an adjusted EPS (earnings per share) of $0.68—compared to analysts’ expectations of $0.67. A strong performance in the smokeless segment drove Altria’s sales and earnings. During the quarter, Altria, in partnership with Philip Morris International, also submitted a modified risk tobacco product application for its iQOS—an electronically heated tobacco product. On approval, Altria will receive exclusive rights to market the product in the US. All of these factors appear to have increased investors’ confidence, which led to a rise in Altria’s stock price. As of March 29, 2017, Altria was trading at $72.96—a rise of 2.5% since the announcement of its 4Q16 results on February 1, 2017.

In 4Q16, Philip Morris International posted EPS of $1.1—compared to analysts’ estimate of $1.13. However, the company beat analysts’ revenue estimate of $6.7 billion by posting $6.97 billion. For 2017, the company set an EPS guidance of $4.80–$4.95, which represents growth of 7.1%–10.5% from $4.48 in 2016. Although its 4Q16 EPS was lower than analysts’ estimate, its strong 2017 outlook and iQOS’s good performance in other markets appear to have led to a rise in Philip Morris’ stock price. As of March 29, 2017, Philip Morris was trading at $113.40—growth of 18.2% since the announcement of its 4Q16 earnings on February 2, 2017.

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Reynolds American posted an adjusted EPS of $0.62—compared to analysts’ estimate of $0.60. Better-than-expected 4Q16 earnings appear to have raised Reynolds’ stock price. As of March 29, 2017, Reynolds was trading at $62.94—growth of 4.0% since the announcement of its 4Q16 earnings on February 9, 2017.

Year-to-date performance

Since the beginning of 2017, Altria, Philip Morris, and Reynolds American have returned 7.9%, 23.9%, and 12.3%, respectively. During the same period, the broader comparative index, the First Trust Morningstar Dividend Leaders Index ETF (FDL), returned 3.9%. FDL has invested 11.6% of its holdings in cigarettes and tobacco companies.

Series overview

In this series, we’ll look at the 4Q16 performance of Altria, Philip Morris, and Reynolds regarding key metrics and analysts’ estimates for the next four quarters. Finally, we’ll wrap up this series by comparing valuation multiples and expected stock prices over the next 12 months for all three companies.

In the next part, we’ll discuss tobacco companies’ 4Q16 revenue growth.

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