Tuesday, February 27, 2024
Hometalking numbersEven the government can't stop this industry

Even the government can’t stop this industry

More than half of the nation's attorneys general are calling on major drug chains to follow CVS Caremark's lead by dropping cigarettes from its shelves.

Last month, CVS decided to wind down its cigarette sales as the drug chain focuses more on being a health company. Selling a consumer product responsible for over 480,000 American deaths each year goes against that positioning.

Meanwhile, Goldman Sachs says one tobacco company has a promising future ahead of it. The investment bank upgraded its rating on Lorillard to "buy" from "neutral", saying the company will see double-digit earnings growth and a $60 per share price target. The stock closed at $52.27 on Monday.

So what to make of it all and why does big tobacco continue to do so well in the face of so many hurdles?

Lorillard, which is reportedly being targeted for acquisition by RJ Reynolds, isn't just playing in conventional tobacco. The company is also has about half the market share of the fast-growing electronic cigarettes ("e-cigs") business.

(Read: A Big Tobacco merger could light up more dealmaking)

According to CNBC contributor Andrew Busch, editor and publisher of The Busch Update, that helps Lorillard with the two big things going for it – its earnings and its dividends.

The company recently raised dividends by 12%. "This is the sixth [dividend increase] since 2008," says Busch. "They just increased it February 20 from 55 cents to 61.5 cents. That's always a good sign."

Busch also likes that the company has gone from $2.81 in dividends back in 2012 to a projected $3.45 in 2014.

"Increasing dividends [and] increasing earnings equals a buy," says Busch. "You're seeing some good things on the stock side so I would continue to think it's a buy."

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, also believes Lorillard's stock is a buy based on the technicals.

"This is a highly emotional topic when we're talking about cigarettes and the future of smoking," says Ross. "But, the chart really filters all of that out."

(See: CNBC's Tobacco industry coverage)

Share prices for Lorillard have remained above its 200-day moving average for nearly a year. However, the stock had a downward countertrend channel over the last few months though it recently broke out from it. The breakout is a flag formation pattern, according to Ross.

"The stock should continue higher," says Ross, who sees a pullback from the stock's recent climb above $55 per share. "That's where the stock consolidates, eases those overbought conditions, and gets itself ready for another leg higher. I would be a buyer here on the back of this Goldman call. The chart tells you that the stock is going higher regardless how you feel about smoking."

To see the full discussion on Lorillard with Busch on the fundamentals and Ross on the technicals, watch the video above.

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