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Stubbed out: Cowen cuts ratings for cigarette makers BAT, Imperial Brands, Altria in global sector review

Cowen’s analysts said the downgrades come as they “grow increasingly cautious on the outlook for combustible cigarettes in the US”
Cigarette stubs
They pointed out: “Our new market model suggests cigarette industry volumes will likely fall at an 8% CAGR between 2018-2025"

British American Tobacco plc (LON:BATS) and fellow blue-chip cigarette maker Imperial Brands PLC (LON:IMB) saw their shares go up in smoke on Monday, together with US peer Altria Group Inc. (NYSE:MO) after US broker Cowen pulled back its ratings for all three in a global sector review.

In a note headlined “Tumultuous Times in Tobacco”, the broker’s analysts downgraded their stance on BAT, Imperials Brands and Altria all to ‘market perform’ from ‘outperform’.

READ: £8bn wiped from British American Tobacco’s market cap on reports FDA might ban menthol cigarettes

Cowen’s analysts said the downgrades come as they “grow increasingly cautious on the outlook for combustible cigarettes in the US.”

They pointed out: “Our new market model suggests cigarette industry volumes will likely fall at an 8% CAGR between 2018-2025; with pricing not serving as an adequate offset.”

BAT most disadvantaged

Looking at the individual stocks, the analysts said: “BATS is arguably the most disadvantaged by changes in the US cigarette landscape.”

They pointed out: “Not only is the company the market share leader in menthol (which now faces legitimate regulatory risk), the company has also experienced meaningful market share losses in the ecigarette category for its Vuse offering.”

The analysts said an “offset from more stable volumes internationally should be somewhat helpful” and they also raised their 2019 and 2020 earnings per share (EPS) estimates for BAT on currency factors.

However, they slashed their target price for the Dunhill, Lucky Strike and Camel brands maker to 2,650p per share, down from 4,250p, with the shares trading at 2,476.50p, down 4.1% on Friday’s close.

Imperial Brands most challenged in market terms

On Imperial Brands, the Cowen analysts said: “Of the global tobacco companies under our coverage, IMB has always boasted the most attractive valuation, but has also been the most challenged in terms of market share development.”

They added: “While IMB remains a good cost cutting story, the combination of market share softness in the US, as well as internationally, coupled with increased regulatory risk in the US makes us more cautious on the stock.”

READ: Imperial Brands responds to new US FDA clampdown on vaping products

The analysts lowered their target price for the Winston, JPS and West cigarettes firm to 2,500p from 3,100p after raising their 2019 RPS forecasts but cutting those for 2020, with the stock trading at 2,339.50p, down 4.9%.

Altria growth to be depressed

For Malboro and Benson & Hedges brands group Altria, Cowen’s analysts said: “We are encouraged by MO's investment in JUUL, both as an offset to accelerating cigarette volume declines in the US as well as offering incremental growth from international sales.”

However, they added; “That said, we think EPS growth could be depressed for the next 2 years given the hefty price tag for the 35% stake.”

The analysts cut their 2019 and 2020 EPS estimates for Altria and reduced its target price to $54 from $73. In early New York trading, Altria shares were 3.1% lower at $48.71.

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