Despite decline, tobacco stocks still have allure

Andrew Leckey

April 21, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

The investment allure of tobacco stocks, damaged by fears of increased federal excise taxes and all-out pricing competition, seemed to have gone up in smoke.

The decline began early this year on speculation about how much higher cigarette "sin" taxes will go to help pay for health-care reform sought by Hillary Rodham Clinton.

It accelerated when Philip Morris Cos., acknowledging the inroads of discount cigarette brands, revealed plans to cut the price of its Marlboro brand as much as 20 percent and halt increases on other major brands.

Add to this a negative attitude toward smoking based on health concerns and the resolve of many investors to never own these stocks.

It appeared this once-powerful industry was in ashes.

Well, not exactly. Thanks to deflated stock prices and a growing international market for cigarettes, there's still an investment spark in these most-shunned equities of 1993.

"Negativity surrounding tobacco stocks creates a buying opportunity because when people get emotional, stocks get oversold," said Barry Ziegler, analyst with A.G. Edwards & Sons Inc. "At some point, though not before the administration outlines its plans for health care funding, these stocks will again become popular."

Hold what stocks you have and cautiously consider buying more, say tobacco analysts.

"The fact tobacco stocks are currently cheap is a positive reason for buying," explained Emanuel Goldman, analyst with PaineWebber Inc. "In addition, fears of a sudden 'shocking' increase in excise tax aren't reasonable, for it will likely be spread over several years."

Worries of imminent $2-per-pack excise taxes are unwarranted, analysts contend.

"I expect to see a doubling of the current 24 cents-a-pack excise tax starting in January of next year," predicted Ronald Morrow, managing director with Smith Barney, Harris Upham. "In January of 1995, I see the tax being raised to 75 cents, and then, in January of 1996, to $1."

Don't overlook the world market, they emphasize.

"The investor must remember the U.S. tobacco market is mighty small in comparison to the total world market, which is growing 1 to 3 percent annually," said John Maxwell, analyst with Wheat First Securities. "The U.S. consumes only 500 billion cigarettes of the 5.5 trillion world cigarette market."

Increasing volume and market share in this country is the goal of Philip Morris' pricing moves, and other tobacco companies are likely to follow its lead to some extent.

Stock of Philip Morris Cos. is now rated a hold by Ferst, Morrow, Ziegler and Goldman. Maxwell, who previously had it rated a buy, has it under review.

There are tobacco stocks worth buying, say the analysts:

Universal Corp., world's largest leaf tobacco exporter and importer, is recommended by Ferst and Ziegler. Besides supplying the name brands, it also imports inexpensive tobacco for cheap cigarettes.

UST Inc., producer of Copenhagen and Skoal smokeless tobacco, is suggested by Morrow, Maxwell and Goldman. Tax increases on its products are expected to be less than on cigarettes.

American Brands, a tobacco, life insurance, distilled beverage and hardware company, is a pick of Morrow's due to high dividend yield.

Monk-Austin Inc., a recent initial public offering that buys and processes leaf tobacco, is a recommendation of Ziegler based on attractiveness of the leaf processing business.

RJR Nabisco Holdings, manufacturer of tobacco and food products, is considered attractive by Goldman because it should have a growth rate in the high teens.

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