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Global Tobacco - Smoke Signals
Looking Through the Downtrading Spectre
Global Tobacco
Erik Bloomquist, CFAAC *
(44-20) 7325-9917
erik.a.bloomquist@jpmorgan.com
Sam H Weeman
(44-20) 7742-6481
samuel.h.weeman@jpmorgan.com
J.P. Morgan Securities Ltd.
* Registered/qualified as a research analyst under NYSE/NASD rules
See page 57 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
Sector View & Outlook
• Why Emerging Mkt Downtrading Appears Unlikely. A constant concern
for Tobacco investors remains reversal of the Emerging Market uptrading
trend of recent years, for example in markets like Russia. In our view, in
addition to the fact that none of our international companies have seen
changes in end consumer behaviour, downtrading appears unlikely at this
time for the following reasons. Company leverage to EMs ranked most to
least in our view is BAT, PMI, JT, IMT, & KT&G.
• Sustained Spikes in Unemployment the Threat. The unemployment rate
forecast in key EMs and indeed across many MMs is relatively stable, with
the JPMorgan’s economics team forecast for the US showing the largest
increase. This implies that pressure on consumers to change their
consumption habits is not likely in most markets, though adding uncertainty
to the US outlook. (see page 3)
• Tobacco a Different Consumer Experience. In addition, regular Tobacco
consumers tend to use cigarettes or smokeless multiple times a day,
reinforcing the brand’s importance. Moreover, many Tobacco brands are
aspirational in nature, and in the case of cigarettes are consumed
conspicuously. This is in contrast most other branded consumer products,
many of which are used once per day or less and the brand used is not
evident to others, e.g. laundry detergent.
• Tobacco Outlook. JT, our Global Top Pick could remain under pressure if
JPY strength relative to GBP and RUB does not slow, given the next major
catalyst in our view is some months away. We expect the key for US mkt
names will be Altria Q4 results and guidance for 2009 on Thursday. As
discussed in our Preview, implications from that guidance with respect to the
industry volume, pricing and regulatory environment will be the key
takeaways.
Upcoming Catalysts
Date Event
29-Jan Altria F08 Results
3-Feb Imperial Tobacco Trading Update & AGM
4-Feb PMI F08 Results
4-Feb Souza Cruz F08 Results
5-Feb RAI F08 Results*
9-Feb Japan Tobacco Q3 3/09 Results
9-Feb Lorillard FY08 Results*
17-Feb PMI presents at CAGNY
18-Feb Altria presents at CAGNY
18-Feb Swedish Match F08 Results
26-Feb BAT F08 Results
1-Apr Expected $0.61/pk FET increase implementation
26-Jun JPMorgan Global Tobacco Conference
Source: Company reports and J.P. Morgan estimates. * Estimated dates.
Table of Contents
Weekly News Summary ...........................................................5
Company Update .........................................................................................................5
Industry Update............................................................................................................6
Regulation & Tax Watch .............................................................................................7
Tobacco Calendar ....................................................................8
Latest Published Research......................................................9
Japan Tobacco (2914) : Valuation Gap Too Wide, Positive Catalysts Coming
(24 Jan 2009) .............................................................................................................10
KT&G Corp : 4Q08 results review (22 Jan 2009) ..................................................28
U.S. Consumer Staples : December Quarter Earnings Preview (21 Jan 2009)........34
British American Tobacco (M) Bhd : We remain defensive; raising PT to M$47
(20 Jan 2009) .............................................................................................................44
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