(Tobacco earnings preview updated with with Morgan Stanley analyst commentary.)
NEW YORK (TheStreet) -- Tobacco stocks have generated significant investor heat of late.

While the tobacco bulls continue to emphasize the group's steady and satisfying yields, the bears continue to point out the decline of the U.S. tobacco market, the social stigma attached to smoking, tough regulations, lawsuits and a host of other ever-present challenges facing the tobacco industry.

As Moody's noted in its most recent report on the tobacco industry: "We expect cigarette sales volumes to decline 3% to 4% per year through 2012 due to higher excise taxes, increased regulation and public bans on smoking." All of which sounds dire, yet later in the report, Moody's points out that "despite this continuing secular decline in cigarette sales, tobacco companies have maintained high profitability through price increases, cost cuts and growth in adjacent categories such as smokeless tobacco and cigars."

Furthermore, Moody's outlook for the U.S. tobacco sector is stable.

Hot Tobacco Stocks: Altria, Philip Morris International

"This outlook expresses our view that fundamental credit conditions in the industry will neither improve nor weaken materially during the next 12 to 18 months." Indeed, for every bear case scenario for the major tobacco stocks, there always seems to be a neutral to bullish stance to match -- but which side has the edge?

Here then, TheStreet presents four of the largest tobacco stocks and analysts views about them ahead of their soon-to-come quarterly earnings reports. Read on to see which stocks appear ready to catch fire -- and which are poised to go up in smoke....

Altria ( MO - Get Report)

Earnings Release: Oct. 20, before the market open, unconfirmed.

Consensus Estimate vs. Actual Year-Ago Earnings: 52 cents a share on revenue of $4.42 billion vs. 48 cents a share on revenue of $4.32 billion in the third quarter of last year.

Ahead of Altria's third-quarter earnings report, Morningstar analyst Philip Gorham said that Altria is poised to produce stable, medium-term earnings increase given the addictive nature of cigarettes and the company's U.S. market dominance, which provide Altria with a wide economic moat.

From Gorham's perspective, Altria exhibits winning attributes despite numerous headwinds owing to the difficult U.S. tobacco industry -- over the last three years, Altria divested its nontobacco and international units. Gorham cited the decline of cigarette volumes, the weight of the FDA's regulatory control and the ever-present threat of lawsuits. "In spite of these headwinds, tobacco manufacturing is still a lucrative business," Gorham said in an analyst note.

Morgan Stanley analyst David Adelman currently maintains an equal-weight rating view on Altria and an in-line view for the U.S. tobacco industry. "Although recent operating results have modestly exceeded our forecasts, the sector has been materially re-rated. We believe the capital markets -- in a search for yield -- now value U.S. domestic tobacco stocks at relatively high absolute EV/EBITDA levels, particularly when taking into account MSA accruals and other non-debt liabilities."

Actual Earnings Results: Altria raised its full-year guidance for reported earnings to a range of $1.83 to $1.87 a share from a range of $1.81 to $1.85, reflecting tax benefits.

The company also reaffirmed its full-year guidance for adjusted EPS in the range of $1.87 to $1.91, representing a projected growth rate of 7% to 9% from an adjusted base of $1.75 a share in 2009. The Wall Street consensus projection for full-year earnings is $1.89 a share.

Altria said third-quarter net earnings increased 28.2% to $1.13 billion, or 54 cents a share, from $882 million, or 48 cents, in the year-ago period. Net revenue rose 1.6% to $6.4 billion from $6.3 billion the previous year. The Wall Street consensus projection for the quarter was 52 cents a share on revenue of $4.42 billion.

"We are maintaining our equal-weight rating on Altria following its above- consensus third-quarter results, and we believe the company's stable earnings outlook and high dividend yield is fully reflected in current valuation," noted Morgan Stanley analysts David Adelman, Matthew Grainger and Toby McCullagh in a client note. "Perhaps the most important takeaway from ... results was the fact that they were driven principally by strong pricing, volume declines in line with the industry, and the flow-through of cost savings."

Lorillard ( LO)

Earnings Release: Oct. 26, before the market open, unconfirmed.

Consensus Estimate vs. Actual Year-Ago Earnings: $1.64 a share on revenue of $1.01 billion vs. $1.44 a share on revenue of $953 million in the third quarter of last year.

In advance of Lorillard's third-quarter earnings report, Deutsche Bank analyst Marc Greenberg maintained a hold rating for Lorillard, factoring in regulatory risk to menthol -- which is 90% of revenue -- amid the FDA Science Committee review through March 2011 and limited upside potential to his $84 price target.

This, even though Lorillard has had solid market share and pricing gains, the analyst said.

Recently Liggett Vector ( VGR - Get Report), a discount cigarette manufacturer with a market share of 2%, increased prices by about 7.5 cents per pack on the majority of its brands. UBS estimated that this is roughly equivalent to a 2% to 3% addition per pack at the manufacturer level, as discount players look at price increases due to the greater costs of doing business amid FDA compliance fees and bigger taxes.

"The deep discount players have actually raised prices by a greater magnitude than premium players have over the past 18 months," UBS analyst Nik Modi said in a research report. He thinks that over the next three months, companies including Lorillard, Altria and Reynolds ( RAI) will follow with price increases of their own.

In an equity research report released at the end of September, Goldman Sachs analyst Judy Hong noted that Lorillard cigarette volume share fell 20 basis points vs. the previous month, but was still up 40 basis points year-over-year. She also noted that pricing was up 4.5%.

Actual Earnings Results: Lorillard reported a rise in third-quarter net earnings amid an increase in wholesale shipments and a share repurchase program.

The company said net earnings rose 16.6% to $274 million, or $1.81 a share, vs. $235 million, or $1.44 a share, the same time last year.

Lorillard said the increase in earnings per share included a 14-cent benefit from the company's share repurchase program. Analysts on average were expecting earnings of $1.64 a share for the third quarter.

Net sales increased 10.4% to $1.567 billion, from $1.419 billion the same time last year.

The company said that during the quarter, domestic wholesale shipments increased 5.8% compared with the same period last year, and vs. a 0.8% decline in total industry domestic wholesale shipments.

Lorillard's third-quarter domestic retail market share increased by 1 share point from the year-ago period to 12.9% and brand Newport's domestic retail market share increased by 0.5 share points from the year-ago period to 10.8%.

"Lorillard's very strong third-quarter operating results again underscore Newport's brand equity and the company's unique ability to drive earnings growth through the combination of volume growth, higher pricing and tight cost controls," noted Morgan Stanley analysts David Adelman, Matthew Grainger and Toby McCullagh in an investor note. "Even after adjusting for favorable trade inventory movement, underlying cigarette unit volumes appears to have increased by about 3.8%, and up over 3% on a 12-month trailing basis. We are increasing our 2010 EPS forecasts from $6.54 to $6.70 to reflect above expectations third quarter 2010 performance, and have 'fine tuned' our fourth quarter forecasts around the pending launch of 'Newport Red.'"

Reynolds American

Earnings Release: Oct. 21, before the market open, unconfirmed.

Consensus Estimate vs. Actual Year-Ago Earnings: $1.34 a share on revenue of $2.2 billion vs. $1.24 a share on revenue of $2.152 billion in the third quarter of last year.

Ahead of Reynolds' third-quarter earnings report, Morningstar analyst Philip Gorham said he expects Reynolds, the second biggest player in the U.S. market, to continue to experience an incremental, gradual fall in market share and to continue to underperform. "We think that there are stronger players in the domestic tobacco space," Gorham said in an analyst note.

Still, he noted that the company does have a number two U.S. market position and that Reynolds will continue to be helped by "significant" economies of scale. Furthermore he predicted that the value Pall Mall brand's strength and more expensive Camel brand, which have a combined market share of 10%, will allow Reynolds to produce a surplus in returns on invested capital -- based on a 10-year forecast.

Gorham said one of Reynolds' few growth opportunities is smokeless tobacco, and that the volume of its smokeless tobacco unit, The American Snuff Company, has seen high-single-digit annual growth rate.

In an investor note, Deutsche Bank analyst Marc Greenberg said he remains "hopeful" that there will be share repurchase announcements at Reynolds and Altria over the next 12 months -- serving as a "positive surprise" -- but that there hasn't been enough visibility on this front. He doesn't expect announcements during the company's third-quarter earnings release. Greenberg has a hold opinion for the stock.

Actual Earnings Results: Reynolds American tightened its full-year earnings per share guidance to $4.95 to $5.05 a share vs. the prior guidance of $4.90 to $5.05, while reporting consensus-beating third-quarter earnings.

"Reynolds favorably narrowed its EPS guidance range to $4.95 to $5.05 suggesting 7% to 9% growth. We are increasing our earnings estimate to $5 per share on this quarter's strength," Stifel Nicolaus analyst Christopher Growe noted in an equity research report.

The company reported third-quarter net income increase of 5.2% to $381 million, or $1.30 a share, from $362 million, or $1.24 a share the previous year.

Third-quarter adjusted earnings per share was $1.35, vs. the average analyst estimate of $1.34.

Net sales rose by 4% to $2.239 billion, from $2.152 billion the previous year. The sales consensus estimate for the quarter was $2.2 billion.

During the quarter, "higher pricing and key-brands volume; promotional and pricing efficiencies; and productivity gains more than offset lower overall cigarette volume," the company said in a press release.

In a client note, Stifel analyst Christopher Growe wrote, "we continue with our hold rating viewing the stock as properly valued here with limited upside. The stock trades right in line with tobacco, and we believe tobacco's historically narrow gap to the market and consumer staples."

In an equity research report, Morgan Stanley analysts David Adelman, Matthew Grainger and Toby McCullagh wrote: "following a review of RAI's third-quarter results, we believe the company continues to execute admirably on its strategic plan, with growth brands Pall Mall and Camel currently growing share and overall net pricing remaining strong. From an industry perspective, these results also reinforce our view that the U.S. cigarette operating environment is improving, with MO and RAI delivering about 6% net pricing and suggesting a more normalized 3.5% to 4% volume decline. While we acknowledge the company's recent momentum and attractive dividend yield, we remain underweight given our assessment of weaker long-term growth prospects and an in-line valuation."

Philip Morris International ( PM - Get Report)

Earnings Release: Oct. 21, before the market open, unconfirmed.

Consensus Estimate vs. Actual Year-Ago Earnings: $1.01 a share on revenue of $6.93 billion vs. 93 cents a share on revenue of $6.59 billion in the third quarter of last year.

Ahead of Philip Morris International's third-quarter earnings report, Deutsche Bank analyst Marc Greenberg has a buy rating for the stock. "Our DCF (Discounted Cash Flow) core assumptions are a WACC (Weighted Average Cost Of Capital ) of 8.5%, medium-term cash flow growth of 5% a year and a post year-10 terminal growth rate of -1% (due to regulatory and social pressures on tobacco consumption)," he said in a equity research report.

Greenberg cautioned that on top of general tobacco sector risks such as regulatory pressures and lawsuits, the company is also potentially exposed to harmful currency activities, deteriorating competitive environments in the EU and other key markets, and volatility in emerging market economies, which Greenberg estimates accounts for about 40% of group earnings.

Stifel Nicolaus analyst Christopher Growe, who has a buy rating on Philip Morris International stock, views its dividend yield positively. "The 4.6% dividend yield provides plenty of support for the shares here in our view and while not quite as robust as the U.S. tobacco equities this very healthy dividend stands near the top of its Consumer Staples peer group," Growe wrote in a note to clients.

Actual Earnings Results: Philip Morris International posted lower-than-expected third-quarter earnings, as excise tax increases in Greece and Turkey continued to weigh on the company's overall performance.

Still, Philip Morris International (PMI) lifted its full-year earnings forecast to a range of $3.90 to $3.95 a share from the previously-forecast range of $3.75 to $3.85 a share. Analysts had been expecting full-year earnings of $3.77 a share.

Third-quarter net earnings attributable to PMI rose 1.3% to $1.822 billion, or 99 cents a share, from $1.798 billion, or 93 cents a share previously. Adjusted earnings was $1 a share, vs. the average analyst estimate of $1.01 a share.

Net revenue for the quarter grew less than 1% to $6.577 billion, excluding items. The revenue consensus estimate for the quarter was $6.92 billion.

Stifel Nicolaus analyst Christopher Growe said he would not be surprised to see the stock trade down slightly Thursday morning, the day the company reported, given "an in line EPS quarter, a weaker organic volume performance, flattish organic operating profit growth, and a strong stock price gain of late. However, the growth outlook remains robust in our view driven by price realization."

"We continue with our buy rating and $62 target price as we believe the shares remain compelling at this level," he said in a client note.

Morgan Stanley analysts David Adelman, Matthew Grainger and Toby McCullagh said "PM's underlying third quarter results were undeniably softer than expected, even after adjusting for a number of unusual dynamics. Although there were several contributing factors, the over-arching dynamic -- in our view -- was a temporary quarterly 'lull' in net pricing. Importantly, the core reasons for our overweight rating have not changed, and we remain bullish on PM's 2011 business/operating outlook."

IBISWorld analyst Toon van Beeck said all three categories of the cigarette and tobacco industry -- farming, manufacturing and wholesale -- are at high-risk from competition, strict legislation and anti-smoking lobbying efforts

"The industry is in decline," van Beeck said. "There's been declining consumption." IBISWorld's research shows that the industry is going to decline by about 2% per year on average over the next five years. The analyst said that companies with more exposure to overseas markets -- especially Asia -- could benefit because demand remains strong there.

"Demand overseas is not being affected as much by anti-lobbying campaigns. Any company that has stronger focus on outside markets will certainly look to fare better than other players."

Overall, the industry may be in the high risk category, but hasn't seen much risk volatility. Risk has remained in the medium to high level for the past decade, van Beeck said. The industry also enjoys a high average profit margin of 20% and high barriers of entry into the industry, which helps to offset the overall risk score.

-- Written by Andrea Tse in New York.

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