BRITISH American Tobacco (BAT) is the third-largest cigarette manufacturer in the world. With a global market share of 15 per cent, BAT is Europe's largest tobacco company and has dominant market positions in Latin America, Canada and Australasia.
More than half of BAT's profits come from emerging markets.
In economic downturns, tobacco firms demonstrate their defensive properties.
While consumers may find it easy to rein in their spending on non-essential goods, they find it much more difficult to give up cigarettes. However, steps taken by BAT's management indicate that the stock's success is not solely due to being in a favoured investment sector.
Key to BAT's strategy is the promotion of its "global drive brands", premium products that retail at higher levels than generic cigarettes, which grew by 20 per cent in volume terms over the first half of 2008. In emerging markets, there has been a pronounced trend of customers trading up to more expensive cigarettes.
BAT has been focusing on cutting costs through the rationalisation of manufacturing sites and improving its IT systems. This process has now been largely completed and it is expected that savings generated by these actions will balance out any increase in their variable cost base, such as leaf costs.
We believe BAT's stock will continue to outperform, due to the insensitivity of its earnings to the economic cycle. With a favourable pricing environment and strong cost management, we expect BAT to increase its margins and continue to exceed consensus expectations. Recent results confirm our view with the group demonstrating strong like-for-like sales growth and widening margins.
• This article is for information and discussion purposes and does not form a recommendation by the manager to invest or otherwise.
The full article contains 299 words and appears in The Scotsman newspaper.
