Price increases are expected across the tobacco industry in the coming weeks.
A recent list price increase by one of the tobacco industry giants has set the stage for other companies to follow suit. These price increases are expected to be good news for the industry.
A new report from Wells Fargo reported that Philip Morris USA increased its cigarette list price by seven cents per pack (a 2-3% increase), or 70 cents per carton, across all of its brands including Marlboro.
This increase will be put into effect for shipments on or after May 15, 2016. From a timing perspective, this price increase is roughly in-line with Philip Morris USA’s cigarette price increase last year, which became effective on May 17, 2015. This price increase was anticipated by Wells Fargo, based on feedback in its “Tobacco Talk” surveys.
“Overall, we expect tobacco stocks will react favorably to this list price increase since it suggests the industry’s continued strong pricing power. We reiterate our Overweight rating on the tobacco sector and our Outperform ratings on Altria and Reynolds American Inc,” said Bonnie Herzog, managing director, beverage, tobacco & convenience store research, Wells Fargo Securities LLC.
Price Increase a Positive for the Industry
According to Wells Fargo, this price increase is positive, and it indicates that the industry has retained strong pricing power, which is coming on the heels of several quarters of very strong net price realization for the manufacturers (6-7%).
“Given that underlying cigarette industry consumption will likely revert towards its long-term trend of declining, pricing remains a critical driver of revenue and earnings growth. In fact, manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume,” Herzog said.
Wells Fargo has stated that the company expects Reynolds American and International Tobacco Group will also raise their prices in the next few days, in line with Philip Morris USA’s increase.