Higher Cigarette Prices In Japan To Boost Altria
Morgan Stanley analyst David J. Adelman said higher cigarette prices in Japan and favorable foreign exchange rates led to an increased forecast for Philip Morris International and earnings estimates for its parent company, the Altria Group.
After five consecutive years of relative outperformance, Altria has lagged in 2006, partly due to a mixed performance at Philip Morris International, Andelman said.
"We are increasingly optimistic regarding PMI's operating prospects," the analyst wrote in a note to investors Thursday.
Philip Morris International, a subsidiary of the world's largest tobacco firm Altria Group (nyse: MO - news - people ), said it intends to increase its Japanese net pricing by 10 yen per pack of cigarettes across 85% of its unit volume.
Japan is Philip Morris International's largest market, making up approximately 15% of the division's total operating income.
Given Philip Morris' position in Japan, the recent weakness in the U.S. dollar coupled with higher Japanese prices can't hurt Altria's bottom line. In fact, Adelman said that if current rates continue, currency will be much less of a headwind than he had predicted earlier.
Taken together, Adelman said his forecast for Philip Morris International had improved enough to raise his 2006 earnings estimate for Altria to $5.39 from $5.29 per share, as well as his 2007 earnings estimate to $5.85 from $5.71.
Separately, Andelman said he remained optimistic that the tobacco industry will prevail in the class action lawsuit brought by smoker Howard Engle against Altria's Philip Morris USA and other cigarette makers in 1994 on behalf of smokers nationwide, which ended with an unprecedented $145 billion punitive-damages award.
The case was overturned in 2003 and, a year later, the Florida Supreme Court decided to review the case.
Andelman maintained an "overweight" rating and price target of $77 on shares of Altria. Also rated "overweight" in the tobacco industry was Carolina Group (nyse: CG - news - people ), the U.S.' fourth-largest cigarette maker.
