Analysts at Wells Fargo on Friday offered diverging opinions on U.S. tobacco giants Altria Group, Inc. (MO) and Reynolds American, Inc. (RAI).

The firm said it upgraded MO from “Market Perform” to “Outperform” and lifted its price target range from $26-28 to $31-33. That new range suggests up to a 9.5% upside to the stock’s Thursday closing price of $30.14.

A Wells Fargo analyst commented, “We believe MO is well on its way to achieving a better balance between stabilizing Marlboro market share and growing profitably. Therefore, we upgrade MO…MO is now our top U.S. tobacco stock pick. Based on feedback from our ‘Tobacco Talk’ survey dated 3/22/12, PM USA has continued to increase promo spending behind Marlboro Special Blends which, along with its successful Marlboro Black launch in 12/2011, should lead to increased share gains for the brand franchise as early as Q1.”

Meanwhile, the firm downgraded RAI from “Outperform” to “Market Perform” while lowering its price target range from $41-43 to $38-40. That new range implies zero upside to the stock’s Thursday closing price of $41.30.

The analyst commented, “We think Pall Mall may soon be under siege from heightened promotional activity among 2nd tier brands. Pall Mall is RJR’s largest brand, so we believe that RAI has the most to lose as the 2nd tier category becomes more competitive. To maintain market share RJR will likely have to increase promotional support, which should pressure margins. Still, we think it will be challenging for Pall Mall to maintain recent growth rates, and we are reducing our volume growth forecast and EPS estimates as we think valuation is full. Therefore, we are downgrading our rating on RAI and our valuation range.”

Altria shares rose 21 cents, or +0.7%, in premarket trading Friday, while Reynolds shares fell 39 cents, or -0.9%.

The Bottom Line
Shares of Altria Group (MO) have a 5.44% dividend yield, based on last night’s closing stock price of $30.14. The stock has technical support in the $28 price area. If the shares can firm up, we see overhead resistance around the $31 price level. Shares of Reynolds American (RAI) have a 5.42% dividend yield, based on last night’s closing stock price of $41.30. The stock has technical support in the $38-$40 price area. The stock is trading near all-time highs.

Altria Group, Inc. (MO) and Reynolds American, Inc. (RAI) are both currently rated “Neutral” by Dividend.com.

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