Goldman Sachs Upgrades Philip Morris (PM) to Conviction Buy as Analyst Favors 'Heat-Not-Burn' vs E-Vapor
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(Updated - September 12, 2016 8:47 AM EDT)
Goldman Sachs upgraded Philip Morris (NYSE: PM) from Neutral to Conviction Buy with a price target of $114. Analyst Judy E. Hong highlighted accelerating EPS momentum, increased confidence in Next Generation Products, and improving capital allocation. Goldman Sachs expects a dividend hike in mid-September and resumption of share buyback by mid-2017, assuming stable currency. Hong said she favors heat-not-burn vs. e-vapor and thinks Philip Morris is best positioned.
"We are increasingly bullish on the prospects of Next Generation Products (NGPs) to drive incremental volume and profit growth for the global tobacco industry over time. We estimate NGPs to reach 6%-7% of 23 tracked cigarette markets by 2020, up from 1%-2% today. Our analysis also points to NGPs adding 0.5%-1% of incremental cigarette-equivalent volume growth, as our global cigarette industry volume forecast for cigarette-only in these markets is a decline of 2.5% CAGR (which assumes a more accelerated decline in key NGP markets) through 2020 while our cigarette plus NGP forecast is a more modest decline of 1.5% CAGR through 2020," said Hong.
Elaborating on heat-not-burn vs. e-vapor, the analyst said, "E-vapor products are currently more advanced vs. Heat-Not-Burn (HNB) products in the US and most European countries. Japan is the exception as e-cig/vapor products are banned and PM’s iQos HNB products have dominated the market. While regulation and innovation are likely to continue to shape the NGP industry going forward, we favor HNB as it is likely to appeal more to mainstream smokers, in our view: (1) HNB conversion rates have so far been much higher than that of E-vapors in markets where iQos has been rolled out, and (2) we believe HNBs more closely mimic smoking process, rituals and nicotine delivery vs. e-vapors"
Hong added, "We see PM as best positioned among major players within NGPs and expect NGPs to contribute 5%-6% of EPS by 2020. This is driven by our view that iQos will drive a rapid expansion of NGPs in its key markets, PM has an early-mover advantage both on R&D, manufacturing and scientific package."
Shares of Philip Morris closed at $97.54 yesterday.
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