Tuesday, Credit Suisse upgraded Philip Morris International, Inc. (PM) shares to Outperform, while downgrading Lorillard, Inc. (LO) shares to Neutral. The brokerage also downgraded Tobacco sector to Market Weight from Overweight.
Analyst Wrede expects volume declines to settle back down to the 3%-4% historical average rate of decline for cigarettes and MST volume to grow in the 5%-6% range, but he would watch for any signs of a consumption shift from cigarettes to MST due to the changed relative price levels. Still, the analyst is cautious about the 3 U.S. tobacco stocks, Altria Group Inc. (MO), Reynolds American Inc. (RAI), and Lorillard, due to concerns about a more promotional environment and the impact of FDA regulation on LO's valuation.
Following last month's SAMHSA report on menthol, the analyst is growing concerned that parts of the federal government are taking a more negative position in the menthol issue. The analyst still does not believe that a ban is likely, but he is not ruling out that the FDA might take some action on menthol, e.g., further studies, bigger or different warning labels, or reducing the amount of menthol. Due to this uncertainty, the analyst expects LO's valuation premium to its peers to decrease this year.
The analyst said that other aspects of FDA regulation seem to be very manageable for the U.S. companies, especially after the color advertising ban was overturned in court. But the uncertainty about the FDA this year reduces the ability of the U.S. tobacco companies to improve valuations relative to the market.
The analyst believes that he is starting to see lifecycle issues for Marlboro, which in second quarter of 2009 lost market share for the first time since first quarter of 2003. Combined with continued pulse promotions for Pall Mall and a downtrading environment in at least first half of 2010, the analyst expects more promotional spending across the industry in 2010.
Given these domestic concerns, the analyst prefers international tobacco stocks for the year, where he expects downtrading in emerging markets to improve by the middle of the year and continued strong pricing in developed markets. Given these considerations the analyst is downgrading the sector to Market Weight. The upside risk is a rerating of the tobacco space due to a rotation back into staples stocks.
The analyst is also downgrading LO to Neutral, as he is concerned that the menthol uncertainty will lead to a reduction of the valuation premium over the peers. With the better international outlook, the analyst is upgrading PM to Outperform. Currency is still a concern for the stock, but it appears to have started to decouple from the exchange rate in the last 1.5 months.
For comments and feedback contact: editorial@rttnews.com
June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.