J.P. Morgan initiated
with an overweight rating, saying the stock is its favorite tobacco pick because of several attractive valuation scenarios and an improving litigation picture.
The brokerage said fair value on the stock is $61. Altria closed Wednesday at $50 and is currently indicated around there on Island.
Altria currently owns a controlling stake in
( KFT) and other food operations that J.P. Morgan says are worth $48 billion, leaving the Philip Morris stub trading at about $26 a share, or at a multiple of 5 times enterprise value over earnings before interest, taxes, depreciation and amortization.
"We view this valuation as unjustifiably low when compared to closer global peer
British American Tobacco, which trades on a 20% premium on enterprise value to EBITDA, in spite of having a similar long-term EBITDA growth profile," J.P. Morgan wrote.
"Moreover, our sum of the parts analysis shows that the market currently values Altria's U.S. tobacco subsidiary, Philip Morris USA, at virtually zero. This highlights the market's excessively conservative stance toward U.S. litigation risk in our view," it wrote.
On an operations basis, the brokerage says Altria should be able to stem the inroads being made by discount cigarettes by higher promotional spending next year, improve its bottom line through cost-cutting, and benefit from economic growth, among other positive factors.