BAT's smoking returns

Hard times are rarely enough to force people to kick their smoking habit, which leaves cigarette sellers as intrinsically defensive plays. British American Tobacco (BAT) looks like an especially robust option – the FTSE may have lost 8 per cent of its value since the start of 2011, but BAT's shares are up over 20 per cent in that time.

BAT's operational performance remains sound, too. With its trading update at the end of October, for example, it reported organic revenue growth of 7 per cent in the nine months to the end of September. And BAT's four main brands – Kent, Lucky Strike, Pall Mall and Dunhill – all made progress. In fact, helped by strong growth in Russia, Romania and the Ukraine, Kent saw volumes rise 9 per cent. Meanwhile, Lucky Strike's and Pall Mall's volumes grew 9 per cent and 12 per cent, respectively.

Still, BAT is facing challenges in 2012. In Australia, for example, BAT has now joined Altria in suing the Australian government over plans to force cigarettes to be sold in plain, olive coloured cartons. True, tobacco companies are no strangers to litigation. But this case has significant implications. That's because packaging and design are considered to be part of a company's intellectual property, which is protected by international treaties. Should the Australian government override these obligations, that could trigger a cascade of similar legislation in other countries.

Investec Securities says...

Buy. We revisit our forecasts for the first time since BAT's third-quarter update, although the numbers change fairly modestly with an upgrade to our 2011 full-year estimates of 1 per cent. This primarily reflects a more optimistic view of top-line progression given stronger volume performance in the third quarter. What's more, we see BAT as having materially superior long-term earnings prospects to rival Imperial Tobacco given its exposure to faster-growing markets, stronger leadership and better potential to improve margins. Our fair value estimate stands at 3,300p and we expect full-year pre-tax profit of £5.5bn, giving EPS of 188.6p.

Charles Stanley says...

Buy. The group's four key global brands continue to perform and BAT has increased market share in 40 markets. It has also been reclassified as a domestic asset on the Johannesburg stock exchange, which will increase the liquidity of the shares in one of the company's biggest markets. In summary, BAT continues to demonstrate resilience, benefits from solid defensive characteristics while there are expectations for high single-digit earnings growth, a global exposure with emerging market leadership, scope for further margin expansion and a supportive share buy-back programme. We retain our buy recommendation ahead of full-year results in February.