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Tobacco Revenue Climbing

U.S. tobacco companies are expected to post solid profits when they report second quarter results next week, but foreign currency rates could hit the largest cigarette maker, Philip Morris, going forward, analysts said.

Analysts expect the top two U.S. cigarette makers, Philip Morris Cos. Inc. and R.J. Reynolds Tobacco Holdings Inc., along with chewing tobacco maker UST Inc., to meet or exceed consensus expectations for the quarter. But looking ahead, the outlook is not as bright for the full year.

"In times of everyone pre-announcing and missing earnings, boring is good," Credit Suisse First Boston's Bonnie Herzog told Reuters. "If you look at the overall market, all the blowups, this should be a good place for investors to hide."

Philip Morris has said it sees 9 percent to 11 percent underlying earnings per share growth for the full year, the report said.

While Herzog expects the company to cast a lower stance on its profit prospects, she cites foreign currency as the cause. "The encouraging thing about that, in my opinion, is that it's out of the company's control," Herzog said. "I like the fact that if earnings are going to be a little bit lighter than we expected, it's not necessarily that the fundamentals are deteriorating."

Salomon Smith Barney tobacco analyst Martin Feldman expects Philip Morris to narrow its full year earnings per share range to around $4.04 to $4.10, due largely to concern over the ongoing strength of the U.S. dollar.

But Feldman added that the international tobacco unit is "picking up new volume, additional market share, and local currency earnings gains in virtually all its key national markets. Its strength remains intact, despite the strengthening dollar."

R.J. Reynolds has used promotions to boost sales of its brands, but analysts say such promotions will not help the company ensure long term success, the report said. "We do not believe that RJR's rented market share is sustainable," Feldman said. "As soon as its promotions ease, its share is likely to slide.

Chewing tobacco maker UST has said it expects earnings to climb 6 percent in the second quarter and 10 percent for the full year, the report said. Feldman calls the company's prospects for 6 percent earnings per share growth to 73 cents "likely." He said sales of premium brands Skoal and Copenhagen may have declined, but sales of lower margin brands, such as Red Seal, may have jumped some 30 percent. He sees total volumes up slightly.

UST's sales could also be boosted by wholesale price increases the company took on a variety of its brands in May. While Feldman expects UST to deliver its forecast of 10 percent earnings per share growth this year, Herzog does not think such growth is "doable."
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