Higher Tobacco Taxes in Japan = Higher Tobacco Co Profits (BTI, MO)

Mary Crane of Forbes.com published a piece earlier this morning entitled, "Higher Cigarette Prices In Japan To Boost Altria." The Japanese government is raising taxes on cigarettes from this July and naturally the cigarette manufacturers are raising prices and doing so in excess of the tax.

Disclosure: I own a long position in Altria (MO) and am obviously happy about the news. I find it interesting how governments raise taxes on tobacco not just to curb its consumption but more importantly to make some money themselves and to help pay medical care costs of those who are already suffering from tobacco related illness. I think we've found out that taxes are only a small deterrent to smokers and most people who smoke will continue to do so and tend to stop more based on health concerns than monetary reasons. In Japan's case the government foots a good majority of health care costs. If Altria's Philip Morris International and other tobacco companies can then raise prices to recoup higher taxes and even raise them higher than the tax increase, more power to them.

At any rate, the tax is planned at 0.85 yen per cigarette with a standard pack containing 20 cigarettes. That equals 17 yen for all you non-math majors out there. However, the Japanese operations of Altria-Philip Morris International and British American Tobacco (BTI) are raising prices at least 20 yen on most packs and in some cases as much as 30 yen a pack. The Japan Times on-line stated that the tobacco companies are justifying the extra price hike beyond the tax increase because of "costs incurred by the introduction of new vending machines designed to prevent purchases by minors." Japan Tobacco (Tokyo: 2914) is also raising its prices. The trend is to raise prices by 30 yen on the best selling brands.

NikkoCiti upgraded Japan Tobacco from a "2M" to "1M" and raised its target price to 58,000 yen from 37,000 yen, citing a favorable domestic market and the cheaper cost of cigarettes in Japan compared to North America and Europe, giving domestic tobacco operators more pricing power going forward. Japan Tobacco closed Friday at 434,000 yen ($3,915.90).

Crane's article was in regards to Morgan Stanley (MS) analyst David J. Adelman, who sees the cigarette price increase and favorable FOREX rates as reason to boost Altria's earnings estimates for 2006 to $5.39 from $5.29 per share and for 2007 to $5.85 from $5.71. He maintained an "overweight" rating and price target of $77 on Altria.

Crane mentions that "Japan is Philip Morris International's largest market, making up approximately 15% of the division's total operating income."

MO, BTI, Japan Tobacco 1-year stock chart comparison: