Cigarette Increase Likely

Tobacco analyst Bonnie Herzog forecasts higher manufacturer spike than last year

NEW YORK -- It's becoming an annual tradition. In the month of good cheer, Philip Morris USA has hiked manufacturing prices, typically spurring a toe-the-line approach with the other manufacturers following suit.

Expect the same for the third consecutive year, said Citigroup tobacco analyst Bonnie Herzog. For 2006, we expect a price increase to occur around the end of the year, she told CSP Daily News. She'll expand on this and other tobacco news during an exclusive CSPNetwork CyberConference tomorrow. [Click here to register for the free session.]

We expect the price increase to be slightly higher than the 2007 step-up in MSA (Master Settlement Agreement) payments, she said. We also anticipate that Philip Morris USA will continue to lead these increases.

Herzog, who tomorrow will deliver a detailed update on the tobacco industry--including the continued strength of other tobacco products (OTP) and the decision by The Altria Group to spin off Kraft to make PM USA a standalone company--suggests the likely price hike signals continued strength in the premium cigarette market.

She noted that PM USA reduced its off-invoice discount from $5.50 to $5 a carton last December on its four core brands, and the year before also took a price increase.

Overall, she said, these price increases give us continued confidence that the industry maintains pricing power and U.S. fundamentals of the cigarette manufacturers continues to improve.

In other news, Herzog continues to remain impressed by the strength of Newport despite little promotional spending by Lorillard. We had been concerned with the company's low level of investment spending, she said. However, Lorillard's one-trick pony continues to outperform.

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