Tobacco stocks moved broadly higher Tuesday after the Food and Drug Administration (FDA) gave industry bellwether Philip Morris International Inc. (PM) approval to market its IQOS tobacco heating system as a safer alternative to traditional smoking. The agency said scientific studies found that moving to the IQOS system from cigarettes significantly reduces exposure to harmful chemicals.
The company's CEO Andre Calantzopoulos believes that the decision gives consumers a less hazardous option for consuming tobacco. "IQOS is a fundamentally different tobacco product and a better choice for adults who would otherwise continue smoking," he said, per Bloomberg. Meanwhile, Morgan Stanley analyst Pamela Kaufman said that the favorable marketing ruling opens the door to broader IQOS adoption in the United States.
Below, we take a closer look at Philip Morris and two other leading tobacco companies poised to benefit from the FDA's decision. We'll also analyze the chart of each firm to identify tactical trading opportunities.
Philip Morris International Inc. (PM)
Philip Morris sells IQOS products, including heated tobacco and nicotine-containing vapor products under brands such as HEETS and HEETS Marlboro, as well as Marlboro HeatSticks and Parliament HeatSticks. The tobacco giant reported that its first quarter heated tobacco shipment volumes rose to almost 16.7 billion units, representing a 45.5% increase compared to the year-ago period. However, management anticipates weaker second quarter sales due to the impacts of COVID-19. From a valuation standpoint, the company trades at around 14 times forward earnings, well below the five-year average multiple of 18 times. Philip Morris shares have a $113.58 billion market capitalization, offer an attractive 6.63% dividend yield, and are trading 11.53% lower year to date (YTD) as of July 8, 2020.
The cigarette maker's share price has traded within a 30-point symmetrical triangle since the start of March. Yesterday's development saw buyers pile into the stock near the pattern's lower trendline at $70, with price trending comfortably higher throughout the session to close above the 50-day simple moving average (SMA). Those who enter here should consider setting a take-profit order near crucial overhead resistance at $86 while protecting capital with a stop placed under last month's low at $68.37.
Altria Group, Inc. (MO)
Richmond, Virginia-based Altria Group, Inc. (MO) markets cigarettes, smokeless products, and wine in the United States. The company's Oral Tobacco Products segment – home to its IQOS system – posted an 11.3% year-over-year (YoY) increase in first quarter sales due to higher pricing and volumes. Shipments for the division grew 2.8% during the period, in part due to customers stockpiling products early on in the pandemic. Wall Street has a 12-month price target on the stock at $47.93, offering a 20% premium to Tuesday's $39.94 close. As of July 8, 2020, Altria shares have fallen 11.23% on the year but issue a smoking hot 8.53% dividend yield.
Altria's share price has tracked higher along the lower trendline of a four-month ascending triangle, finding dual support from the 50-day SMA. Active traders who anticipate further upside should consider setting a profit target at $49, where price may run into resistance near the 2020 high. Manage risk by positioning a stop-loss order beneath the June 26 low at $38.09 and raising it to the breakeven point if the stock breaks above the triangle pattern's top trendline.
Universal Corporation (UVV)
With a market cap exceeding $1 billion, Universal Corporation (UVV) is one of the largest suppliers of leaf tobacco in the world. The 134-year-old Richmond-based company primarily markets to manufacturers of consumer tobacco products. The leaf tobacco merchant reported fiscal fourth quarter adjusted earnings of $1.08 per share on revenues of $632.1 million. Higher sales volumes in Africa and Asia were offset by weaker sales volumes in Brazil, Europe, and North America, with shipment delays weighing on the firm's top line. YTD, Universal stock has tumbled 23.54% as of July 8, 2020.
Since late April, the stock has oscillated within a descending channel to establish high-probability entry and exit levels. Traders should consider taking a long position around $40, where the shares encounter crucial support from the channel's lower trendline. In terms of trade management, book profits on a move to the pattern's opposite side at around $46.50. Cut losses if price fails to hold above the June 25 low at $39.68.
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