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UBS on U.S. Tobacco: Stay the Course: Still Bullish on Tobacco

January 5, 2012 2:42 PM EST Send to a Friend
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Price: $40.36 -0.59%

Rating Summary:
    7 Buy, 6 Hold, 0 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 39 | Down: 30 | New: 13
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UBS on U.S. Tobacco: Stay the Course: Still Bullish on Tobacco

Analyst, Nik Modi, said, "Key Pillars for Bullish Stance Still Relevant: In our initiation in 2005 we identified 3 key drivers of tobacco stock performance: 1) sector rotation, 2) changes in interest rates and 3) favourable pricing. In our opinion, these key stock drivers remain favourable for the industry. We believe it makes sense to stay the course, though stock selection will be key."

"Designating Altria (NYSE: MO) as Our #1 Pick: We designate MO as our top pick for the following reasons: 1) we expect Marlboro to stabilize its share in 2012, 2) MO boasts the cheapest valuation and highest dividend yield among its peers, and 3) we expect further increases in cash distribution. We are raising our target to $33 from $30 to more accurately reflect the valuation of Altria’s tobacco assets, 14x MO’s tobacco earnings of $1.81+ the market value of the SABMiller stake ($7.40 per share)."

"We think Lorillard (NYSE: LO) is Still the Best Fundamental Story, but Timing is Everything: The only thing holding us back on making LO our #1 pick again is the FDA’s pending announcement on findings from a peer review on the menthol science. We retain our Buy rating but think investors may wait for the announcement before aggressively adding/building to positions."

"Downgrading RAI to Neutral - Our downgrade is primarily a function of Reynolds America's (NYSE: RAI) current price is within striking distance of our $42 price target. With its valuation already ahead of LO/MO’s and little conviction that meaningful positive EPS revisions are on the horizon, we cannot justify taking up our target at this time."




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