Tobacco Weathers European Recession

Monday, 04 Feb 2013 08:22 AM

By Michael Kling

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Tobacco remains one sector that’s weathering recession well in Europe. Europeans may have turned to cheaper brands and illicit trade, but they are still smoking, even if their economy isn’t.

“Smokers have largely stuck to their habit in Europe through the downturn but have changed where they get their tobacco from. There has been an accelerated shift to lower price brands, rolling tobacco and illicit trade,” James Bushnell, a tobacco analyst at Exane BNP Paribas, told CNBC.

“The industry has so far shown remarkable resilience and earnings risk remains relatively low in the short-to-medium term.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

And even if tobacco isn’t making users healthy, tobacco stocks are making their investors wealthy.

Shares of British American Tobacco increased 42 percent on the London Stock Exchange over the last two years. Imperial Tobacco was up 33 percent. Over the same period, the FTSE 100 index rose 7.5 percent.

The percent of western European adults who smoke dropped from 24 percent in 2006 to 22 percent in 2011, according to Euromonitor data cited by CNBC. Although the number of smokers barely changed, the tobacco market is not growing.

Companies can only increase prices to obtain revenue growth, analysts point out.

With good dividends but little growth expected, tobacco stocks are a safety play, Erik Bloomquit, an analyst at Berenberg Bank, told CNBC.

“The stocks we think have the most upside are Japan Tobacco, Philip Morris International and BAT [British American Tobacco],” he said.

Government attempts to decrease smoking may be an obstacle for tobacco firms, and illicit trade is growing challenge. Cigarettes and tobacco are increasingly smuggled over borders and bootlegged from counties with lower taxes, and products are counterfeited.

“Our EU performance was impacted by further declines in legal market size with rising illicit trade, in what remains a competitive and tough economic environment,” stated Imperial Tobacco in its announcement covering the fourth quarter of 2012.

Still, last year the company managed to increase cigarette shares in markets such as Spain, Greece, Italy and Portugal and increase fine cut tobacco shares in Germany, Hungary and Poland.

Although the macro environment continues to be challenging in the European Union as well as Russia, the company saw growth in Africa, the Middle East and Asia Pacific, and growth in its fine cut tobacco and premium cigars and snus.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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