Beer and cigarettes, two things your doctor tells you to avoid, and it just so happens that lately, Wall Street has been heeding that advice. At least until now, as cigarette maker Altria Group Inc. (MO) and beer maker Molson Coors Brewing Co. (TAP) have recently fallen into the favor of some analysts. Wells Fargo sees an upside of about 30% for Altria while Credit Suisse thinks Molson could rise nearly 20%, according to Barron’s.
Wall Street's Relapse
Over the past year, Altria is down nearly 13% as of the close of trading on Tuesday, and Molson is down more than 17%. Year to date (YTD), Altria is up just over 2% while Molson is down nearly 2%. Meanwhile, the S&P 500 is up nearly 17% over the past year and up more than 3% so far this year.
Wells Fargo analyst Bonnie Herzog’s most recent price target for Altria is $85, implying a 28.5% increase from Tuesday’s close. Credit Suisse analyst Laurent Grandet’s price target for Molson from last month is $96, implying a 19.3% rise based on Tuesday’s close (the Barron’s article was published on March 10, 2018). (To read more, see: 7 Consumer Stocks That Can Beat the Market.)
While government regulation and taxation have come down hard on cigarette makers, some of those companies are finding the positives. A government ban on cigarette advertising does add new marketing challenges, but it also frees up cash flow, something the entire cigarette industry is now flooded in. Further, higher cigarette taxes have hurt consumer demand, but they’ve also provided good cover for cigarette companies to sneak in small price raises of their own.
Moving forward, Altria may get a break from government regulation as Herzog predicts the FDA will approve IQOS, a new system that is essentially a hybrid between regular cigarettes and e-smokes. Instead of burning the cigarette, which produces the hazardous toxins, the IQOS cigarette is heated, producing a tobacco-flavored vapor. As a healthier alternative that better replicates the traditional experience, Herzog sees Altria exhibiting double-digit growth in earnings through 2020, according to Barron’s.
As a brewer of light economical beers, Molson has struggled in an environment where consumers are either turning towards premium beers or those in the ultralight or low-carb category. But the long-time brewer is adapting to change. (To read more, see: Molson Coors: Legalized Pot May Hurt Beer Sales.)
While increasing efforts in brands that are still successful, such as the Blue Moon brand, the company is moving its experiment with ultralight beers, currently testing one called Miller Ultra. With the rise in popularity of flavored seltzers, Molson is also planning to roll out a line of alcoholic ones, and recently secured an agreement to begin importing into the U.S. a Mexican beer called Sol, according to Barron’s.
The beer maker is also awash in free cash flow that will help it pay down debt, increase dividend payments, and invest in new products. The brighter future outlook gave Grandet reason to upgrade the company’s stock to outperform.