Shares of Altria Group (MO - Get Report) and Philip Morris (PM - Get Report) were moving in opposite directions Wednesday afternoon after Bank of America/Merrill Lynch claimed President-elect Donald Trump's proposed tax policies will affect the tobacco companies in opposite ways.
Altria stock was trading 0.53% higher at $67.98 after the firm upgraded shares to "buy" from "neutral," while Philip Morris stock was 0.84% lower at $90.46 following a downgrade to "neutral" from "buy."
Altria should benefit from Trump's proposed tax cuts as well as the strong U.S. economy, as evidenced by lower unemployment, higher wages, improved disposable income and rising consumer confidence, BofA/Merrill Lynch analyst Lisa Lewandowski said in a note today.
Company-specific tailwinds include the potential commercialization of Altria's iQOS cigarette alternative in the U.S. and quicker growth from beer equity income and buybacks.
Though a positive for Altria, Trump's pro-business policies have strengthened the dollar against other currencies, which is a negative for Philip Morris, according to BofA/Merrill Lynch.
"As a company with 100% of its sales/profits from outside the U.S., but its reporting currency the U.S. dollar, PM will likely manage through another year of currency headwinds as the U.S. dollar strengthens vs. other foreign currencies," Lewandowski said.
Further headwinds for Philip Morris include a general shift out of defensive/bond proxy names, under-performance in its combustible tobacco volumes, stronger competition within the heat-not-burn market and debt covenant constraints that currently prohibit a buyback, BofA/Merrill Lynch claimed.
Philip Morris split from Altria in 2008, but the companies last year disclosed a joint research, development and technology-sharing agreement.
"While we see many potential benefits for PM to want to re-merge with Altria Group, we see limited reasons (at least currently) for MO's management to want to re-merge with PM given MO's track record of unlocking shareholder value post the spin of PM in March 2008," Lewandowski said.
Shares of Altria are up about 18.5% over the past 12 months, and Philip Morris stock has increased nearly 4%.
Tobacco stocks more broadly rose 11.1% in 2016, outpacing the S&P 500's gain of 9.5% for the year, BofA/Merrill Lynch said.