European tobacco companies will enjoy strong cash flow over the next year and even longer thanks to healthy cigarette demand in emerging markets and favorable pricing, Moody's Investors Service reports.
Profits should rise even if overall sales volumes drop.
"Continuing solid cash flow generation will offset declining sales volumes in mature markets and mounting regulatory pressures," Paolo Leschiutta, a Vice President — Senior Credit Officer in Moody's Corporate Finance Group, says in report on the sector.
"As such, we expect operating profit to continue to grow above 6 percent annually for the next 12-18 months."
Companies such as Imperial Tobacco Group and Swedish Match may be battling sluggish demand in maturing markets, though sales of value brands there may pick up as customers switch to discounted products.
Philip Morris International and British American Tobacco, meanwhile, will enjoy robust sales in emerging markets.
Moody's has assigned the sector a positive outlook, though flare-ups in the European debt crisis may hurt business.
Some tobacco companies have expressed concerned that the European debt crisis and global uncertainty in general will hurt earnings.
Philip Morris International, which sells cigarettes under brand names like Marlboro outside of the U.S., cut its 2012 earnings-per-share target to $5.10 to $5.20 per share, down from $5.20 to $5.30 per share forecast in April.
Fitch Ratings, meanwhile, says it's sticking with an "A" rating on Philip Morris International (PMI) stock and a stable outlook.
While demand may drop on a global scale and regulatory pressures may increase on the sector as a whole, pricing and demand in emerging markets offset such headwinds.
"These concerns are however well mitigated by PMI's demonstrated ability to raise prices and generate revenue growth in the order of 6-8 percent annually from price increases and product mix improvements over the same period," Fitch Ratings says in a statement on the company.
"The agency views these trends as sustainable in the medium term and takes comfort from the consolidated nature of the industry as well as from the track record of manufacturer price increases that tend to accompany any gradual excise duty increase imposed by governments."
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