NEW YORK -- Tobacco analysts are calling this week’s increase in cigarette prices a positive for the industry.
“The cigarette promotional decreases/list-price increases indicate continued pricing power, in our view,” wrote Bonnie Herzog of Wells Fargo Securities LLC. “Given that consumption will likely continue to decline in the mid-single digit range, pricing is necessary to drive top-line growth.”
This week, both Altria Group, parent of Philip Morris USA, and Lorillard tobacco Co. announced they will increase prices by 6 or 7 cents per pack effective Dec. 1, 2013m as reported in a Raymond James/CSP Daily News Flash. Reynolds American Inc. is expected to follow suit.
Meanwhile, Philip Morris USA is also increasing the list price of Marlboro Snus tins and Marlboro Snus Flip-Top Box by 6 cents per tin.
We see [Altria’s] announcement consistent with Lorillard's previous reduction in off-invoice promotions and a positive for our bullish thesis on the tobacco pricing environment,” wrote analyst Nik Modi of RBC Capital Markets.
Herzog added, “We believe wholesalers have been building inventory in advance of these price actions, and this could offset volume pressures due to e-cigarettes. We expect overall cigarette net price realization to accelerate in 2013 to about 4%, and we have further conviction industry topline will improve during Q4 and beyond driven by solid volume trends, higher prices and continued easing [of] promotional spending. Pricing is crucial to tobacco manufacturers given they realize about 3x the earnings leverage from a point of pricing vs. a point of volume.”
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