This article is part of a Real Money series on a dozen companies investors should consider adding to their watch list of so-called "vice stocks." The story was updated on April 8 to include a video by Real Money's Jim Cramer.
It looks like 2016 is going to be a great year for tobacco stocks, analysts at Wells Fargo Securities said in a series of recent reports.
And the team of analysts, led by Bonnie Herzog, has an especially bullish position on three members of Real Money's watch list of a dozen so-called "vice stocks": Philip Morris (PM), Reynolds (RAI) and Altria Group (MO).
Altria, whose shares the analysts value at $69 to $71, is in particularly good shape thanks to expected growth in demand for its signature cigarette brand, Marlboro, the analysts said. (Altria shares closed at $63.43 in regular market trading Thursday.)
"We continue to believe Altria Group is uniquely positioned in the U.S. to benefit from strong U.S. tobacco fundamentals," they said. "Further, we remain encouraged that Altria will continue to implement and refine Marlboro's new brand architecture, with further innovation like Marlboro Blue (in 3Q14), Marlboro Edge, Marlboro NXT, Southern Cut and Eighty-Threes. We are optimistic that Marlboro's brand equity and the relevance of the brand will improve."
Meanwhile, shares of New York-based Philip Morris International (PM), the global counterpart of Altria that spun off as an independent company in 2008, also stands to gain from strong customer loyalty to Marlboro, as well as in mounting demand for electronic cigarettes. Philip Morris rolled out its proprietary iQOS technology in November 2014, which aims to produce a hybrid version of electronic cigarettes with more traditional products.
"Our proprietary iQOS interactive model suggests PM's new heat-not-burn technology will revolutionize the global tobacco industry," the analysts said, adding that the iQOS technology "has the potential to change the trajectory of smoking, given the different attitudes toward risk and regulatory constraints on behavior," which also offers a competitive advantage to shareholders of Altria.
Shares of the cigarette makers also could benefit from growing speculation that the two have been considering a merger, the analysts said. "However, regardless of a potential merger between the two companies, we believe PM's strategic framework with MO to commercialize reduced-risk tobacco products and e-cigs is a clear positive for both," they said. Wells Fargo Securities maintains an Overweight position on both companies, and has a $109-to-$111 valuation for Philip Morris shares, which closed in regular market trading Thursday at $100.58.
Meanwhile, Reynolds is also poised for a strong year, courtesy of the company's discount pricing and customer loyalty for its Newport and Natural American Spirit cigarette brands, according to Wells Fargo Securities, which maintains an Overweight position on Reynolds and values the shares -- which closed in Thursday trading at $50.83 -- at $53 to $55.
"We believe RAI has transformed itself into a leaner, more focused, total tobacco company, driven by innovation and a methodical approach to driving sustainable growth," the analysts said. "We believe the stock has further upside potential given several growth drivers."
Real Money's Vice Squad Watch List
- Diageo (DEO)
- Molson Coors (TAP)
- Constellation Brands (STZ)
- Reynolds (RAI)
- Altria Group (MO)
- Philip Morris (PM)
- Vista Outdoors (VSTO)
- Smith & Wesson (SWHC)
- Sturm Ruger (RGR)
- WYNN Resorts (WYNN)
- Churchill Downs (CHDN)
- Las Vegas Sands (LVS)