Citi is worried that cigarette sales volume in the US will be weak. But their thesis, reinforced by a new proprietary survey, remains the same: price increases will likely make up for the lost unit sales:
Exclusive survey suggests 2Q08 pricing has been strong:
PM USA increased prices by 9c/pack on May 5 but in theory that could have been entirely offset by unpublished promotions. Our respondents, who represent thousands of retailers, say in fact the price increase was effective, with little or no offsetting promotions. In 1Q08 PM USA’s pricing was held back by 2-for-1 promotions but 61% of our respondents say PM’s promotions have now been reduced.
Altria (MO) has upside potential:
Our 43c EPS forecast assumes modest price increases in 2Q. (Consensus is 45c). If the 2-for-1 promotions returned to their 4Q07 level and the survey is right on the price increase, our estimate may be 3-4c too low. Furthermore, any positive sign on pricing would support our investment thesis that MO will be able to grow EPS despite volume declines, through pricing, cost saves and buybacks.