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Stock Market News: Altria, Philip Morris Plan Merger; Costco Goes to China

By Dan Caplinger – Aug 27, 2019 at 11:32AM

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A huge shake-up in the tobacco industry had an impact on the overall market.

Tuesday morning brought another positive move to the stock market as investors kept their eyes closely on trade talks between the U.S. and other major trading partners across the globe. As of 11:05 a.m. EDT, the Dow Jones Industrial Average (^DJI -1.17%) was up 28 points to 25,927. The S&P 500 (^GSPC -0.87%) gained 6 points to 2,884, and the Nasdaq Composite (^IXIC -0.97%) picked up 19 points to 7,873.

Huge news on the tobacco front got a lot of attention from investors as Altria (MO -1.53%) and Philip Morris International (PM -3.00%) mull recombining to become a single global powerhouse. Meanwhile, Costco Wholesale (COST -0.89%) made its first foray into China, and the reception that the warehouse retailer got from its customers there showed exactly how much potential the world's second-largest economy has for the company.

Is a tobacco reunification coming?

Shares of Altria jumped 7% after reports surfaced that the U.S. tobacco giant was talking to Philip Morris about a potential merger. Philip Morris shares were down 9% Tuesday morning, as investors expect that the larger international tobacco company will be the one to offer a premium to Altria in an all-stock combination.

Nine cigarettes stacked in rows of five and four.

Image source: Getty Images.

Those who follow tobacco stocks will remember that Altria and Philip Morris used to be a single company. A dozen years ago, Altria spun off its international operations, aiming to insulate Philip Morris International from the highly contentious regulatory environment in the U.S. market while still sharing key assets like the Marlboro cigarette brand.

Yet the two companies have a lot of reasons for getting back together. As it turned out, foreign regulatory efforts got more draconian, making the benefits of independent status for Philip Morris less than originally anticipated. The two companies also continued to work together on initiatives like reduced-risk alternatives to cigarettes, and they expect to collaborate when the IQOS heated tobacco system becomes available to U.S. customers. Altria's acquisition of a big stake in e-cigarette giant Juul Labs could bring a lot of benefits to Philip Morris if the international tobacco giant gains access to Juul's product lines and technology.

It's too early to tell if a deal will actually go through, and the combined move for the two stocks suggests that investors don't expect any immediate boost in total company value from a merger. Yet in its fight against global rival British American Tobacco, bringing Philip Morris and Altria together will create a formidable opponent.

China loves Costco

Costco Wholesale saw its stock rise 3% after the retailer opened its first store in China. The opening attracted a huge number of customers, causing traffic disruptions and eventually leading to the store closing its doors earlier than expected on its first day.

Costco was early in identifying China as a key market. For five years, the warehouse retailer has had an e-commerce presence on Alibaba's online marketplace. Yet even though competitors have also seen the market as attractive, the prevailing trend lately has been to pull back from China -- largely because of fears that trade tensions will escalate.

Yet the way that Chinese shoppers reacted to Costco's opening shows that demand for popular Western store concepts remains strong in China. That's similar to how shoppers have reacted to new Costco stores in a number of different countries. The company has locations in 11 countries outside the U.S., including 13 in Taiwan.

It's good to see that Costco's store concept will fit well with the shopping culture in China. There's plenty of room for more Chinese locations, and investors should expect the retailer to make the most of its opportunities there.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has the following options: short January 2020 $180 calls on Costco Wholesale and long January 2020 $115 calls on Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
$40.54 (-1.53%) $0.63
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$474.71 (-0.89%) $-4.27
Philip Morris International Inc. Stock Quote
Philip Morris International Inc.
$83.51 (-3.00%) $-2.58
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,883.82 (-1.17%) $-341.79
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,608.82 (-0.87%) $-31.65
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,632.92 (-0.97%) $-104.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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