Big tobacco companies should be able to raise prices and keep profits growing despite weakening sales, a Citi Investment Research analyst said Tuesday.
Adam Spielman said Philip Morris International Inc. could post 12 percent annual profit growth over the next few years, and Altria Group Inc. could grow at a 9 to 10 percent clip. That's as good as a lot of other big consumer product makers, he said, but the stocks are trading at a discount because of concerns about litigation and declining sales.
But the companies can keep increasing their profits as long as prices rise faster than sales fall, he wrote. Spielman said a pack of Marlboros costs $11 in the U.K., and prices are still going up to keep pace with wages.
"This implies U.S. prices have plenty of room to increase," he wrote. Costs are also coming down, he added.
Spielman expects the sector to outperform, and he started coverage of PMI and Altria with "Buy" ratings. He placed a "Hold" rating on shares of Reynolds American Inc., and said PMI and British American Tobacco PLC are his top picks.
He said fewer lawsuits are being filed against tobacco companies, so their legal risk has declined.
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