Last week Philip Morris International Inc. (NYSE: PM) reported better than expected earnings and revenues, and Altria Group Inc. (NYSE: MO), Philip Morris’s US counterpart, reports earnings on Wednesday. Lorillard Inc. (NYSE: LO) reports earnings tomorrow, and British American Tobacco plc (AMEX: BTI) has not yet scheduled its earnings release.

Reynolds, like Philip Morris, was able to raise prices during the first quarter, but unlike its competitor, Reynolds experienced a decline in volume. However, Reynolds expects to meet its existing full-year adjusted EPS guidance of $2.91-$3.01.

Lorillard, which reports earnings tomorrow, is expected to post EPS of $2.00 on revenue of $1.2 billion. Altria, reporting on Wednesday, is expected to post EPS of $0.49 on revenue of $4.01 billion.

All the cigarette makers are facing a packaging challenge that is set to take effect in Australia by the end of this year. Packaging would be standardized with no logos allowed. Instead, makers would be required to include graphic images of the diseases caused by cigarettes along with the brand name in a generic type style. British American Tobacco, and others, are challenging the Australian law, and all could soon be challenging similar laws in New Zealand, Canada, Belgium, Iceland, and France.

Far worse, from the tobacco companies’ point of view, would be the adoption of similar laws in the emerging markets of Asia, where sales are growing. There has been no evidence that such laws will be enacted, but the tobacco companies are keeping a close eye on developments.

From an investors point of view, the tobacco companies are particularly attractive for their dividend yields. Reynolds yields 5.40%, Altria yields 5.10%, Philip Morris yields 3.50%, Lorillard yields 4.50%, and British American yields 5.30%.

Shares of Reynolds are off about -1.7% in the pre-market at $41.00 in a 52-week range of $31.82-$42.81.

Paul Ausick

Aeroflex Holding Corp. (NYSE: ARX) Raised to Conviction Buy List at Goldman Sachs.
Amerisafe, Inc. (NASDAQ: AMSF) Maintained Underperform as Bear of the Day at Zacks.
Applied Materials Inc. (NASDAQ: AMAT) Raised to Outperform at Oppenheimer.
Arcelor Mittal (NYSE: MT) Raised to Buy at Citigroup.
BP PLC (NYSE: BP) Started as Underweight at Morgan Stanley.
British American Tobacco plc (NYSE: BTI) Raised to Overweight at CRedit Suisse.
Carrizo Oil & Gas Inc. (NASDAQ: CRZO) Started as Outperform at Oppenheimer.
China Life Insurance Co. Ltd. (NYSE: LFC) Raised to Buy at Goldman Sachs.
Dole Food Company Inc. (NYSE: DOLE) Raised to Overweight at JPMorgan.
Intermune, Inc (NASDAQ: ITMN) Started as Outperform at Credit Suisse.
LinkedIn Corporation (NYSE: LNKD) Started as Hold at Argus.
McDonald’s Corporation (NYSE: MCD) Reiterated Buy with $102 target at Argus.
The McGraw-Hill Companies, Inc. (NYSE: MHP) Raised to Buy at Argus.
NCR Corporation (NYSE: NCR) Started as Buy at Oppenheimer.
Onyx Pharmaceuticals Inc. (NASDAQ: ONXX) Raised to Buy at Goldman Sachs.
Patterson-UTI Energy Inc. (NASDAQ: PTEN) Raised to Outperform as Bull of the Day at Zacks.
Plains All American Pipeline, L.P. (NYSE: PAA) is the Value stock of the day at Zacks.

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JON C. OGG

Here’s a quick chart of trailing twelve-month annual dividend yield and forward annual dividend yield as of Friday’s close, together with the stocks’ 52-week ranges and median share price target.

In a sign that some analysts are losing confidence in the tobacco sellers, Citigroup has downgraded British American and Philip Morris from ‘Buy’ to ‘Hold’. Citi expects smoking to essentially disappear in the next 30 to 50 years. The analyst doesn’t offer a reason for the disappearance, but the logical conclusion is that all smokers will be dead by then.

Even if that’s true, the short-term focus is more important to investors than the outlook for 20 years from now, and the forward yields for the tobacco companies are higher for every company except Reynolds American. That suggests that overall expectations for the tobacco business are still strong.

The reason for the continuing growth projections have to do with the very nature of tobacco itself. In “Barbarians at the Gate,” the story about the takeover of RJR Nabisco back in the late 1980s, one of the tobacco company executives is quoted as saying something like this:

“Cigarettes are the perfect product. You can make them for a penny and sell them for a dollar; people are seriously brand loyal; and the product is addictive.”

The risks of owning a tobacco stock are not insignificant. More litigation, higher excise taxes, more government regulation, and dying customers don’t offer a welcoming environment.

But the tobacco firms’ pricing power is outrageous, especially Altria’s and its Marlboro brand. Marlboro’s US market share is over 40% and the brand sells at a premium of more than 30% to lower cost cigarettes.

Altria’s forward dividend yield is higher than any other, except Vector Group’s. Vector introduced and still makes many discount cigarette brands. The company is smaller than the others we’ve looked at here, but its expected dividend yield is hard to ignore.

Investors untroubled by sin can’t do much better than either Altria or Vector Group. Or is that, can’t do much worse.

Paul Ausick

Allied Defense Group Inc. (ADG) hit a low on an intra-day basis, but it was a strange trade that came right back; could even be a trade break.  Low print was $3.82; close at $4.07; prior range was $3.95 to $8.35.

British American Tobacco plc (NYSE: BTI) fell 3.5% to $43.77; prior 52-week range was $44.96 to $80.65.  Do the Brits not smoke more in a recession? Jolly!

Express Scripts Inc. (NASDAQ: ESRX) down 4.5% at $44.09, low was $44.40 and high was $77.97.  When PBM’s do poorly…

Macerich Co. (NYSE: MAC) fell almost 8% to $5.81 but was as low as $5.64; prior trading range was $5.80 to $76.50.  Ouch, 90% off for the REIT.

United America Indemnity, Ltd (NASDAQ: INDM) down 8% at $3.82; prior range $3.92 to $20.22.

JON C. OGG
March 27, 2009

• Bed Bath & Beyond Raised (BBBY) Raised to Neutral from Sell at Goldman Sachs.
• British American Tobacco (BTI) Raised to Buy at Goldman Sachs.
• Penske Automotive (PAG) Raised to Buy at Goldman Sachs.
• Vertex Pharmaceuticals (VRTX) Started as Buy at piper Jaffray.
• Arcelor Mittal (MT) Cut to Sell from Buy at5 Citigroup.
• Banco Santander (STD) Cut to Underweight at JPMorgan.
• Crucell (CRXL) Cut to Hold at ING.
• Focus Media (FMCN) Downgraded at Citigroup and Goldman Sachs (likely others as well).
• Mindray Medical International (MR) Downgraded at Citigroup and Goldman Sachs.
• Orbitz Worldwide (OWW) Cut to Sell at Goldman Sachs.

Jon C. Ogg
November 12, 2008