Cigarettes could soon cost more
Posted
Jan 29 2009, 04:30 PM
by
Kim Peterson
Rating:
Is it a good or a bad thing that cigarettes could soon cost more? Ask that question in a crowded room and you'll get passionate answers from all sides.
It looks like a cigarette price hike is on the way, due in no small part to coming "sin tax" hikes as states try to raise more cash. The federal government is getting in on the act, too, proposing to increase cigarette excise taxes by as much as $1 per pack.
As you can imagine, taxes were a hot topic on Altria's (MO) earnings call Thursday. Executives could only say that they can't predict what politicians around the country are going to do, so they're prepared for a wide range of scenarios.
But a closer look at the numbers shows a cigarette price increase may already be in Altria's future. That's because Altria thinks its 2009 profit will grow as much as 9% from the year before. Even with a teetering economy, rising unemployment, a drop in consumer spending -- and an almost certain cigarette tax increase on the way.
You don't get 9% growth in that environment without a price hike.
Altria's numbers show that it expects to increase prices at Philip Morris USA to offset volume declines that result from a tax increase, said one analyst, Adam Spielman of Citi.
Tax discussion aside, Altria had a decent fourth quarter. But two current business issues will not please investors. The first is the share buyback program, which Altria is suspending. The company was only about a quarter of the way through its $4 billion share repurchase plan.
The second problem is high interest rates on loans. Altria acquired smokeless tobacco company UST for $10.4 billion, and was hit with higher interest payments than expected on the loans it took to make that deal.
Altria shares started strong this morning but are now unchanged from Wednesday's $16.83 close.
So is Altria's stock worth a look? The company's near-term future is in the political winds at this point, and though it probably has a small army of lobbyists storming Washington, it can't control what happens to taxes.
But there is much going for the company long-term, particularly the promising acquisition of UST. And with a forward P/E of 9.60, the stock is definitely worth a look. That is, if you can get past any ethical concerns about owning a tobacco company.
A tax increase will inevitably push some customers to discount brands, but Altria seems to be ready for that.
Image credit: Tomasz Sienicki, Creative Commons Attribution 2.5 license
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