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Global Tobacco - Smoke Signals
Tobacco's Time When Everything Else is Up in Smoke
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 56 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
• Stable Outlook with High Dividends Makes Tobacco Attractive.
Although Tobacco stocks are not immune to the market sell-off, we
believe their businesses remain healthy, a view reinforced by BAT’s and
Swedish Match’s results and Altria’s and PM's CAGNY presentations.
Whether the subject is US smokeless growth or growth in various
economically stressed countries in Eastern Europe, Tobacco businesses
are delivering solid results with more likely in 2009 in our view. And in
the interim, most of the companies are paying secure dividends that at
current stock levels provide yields of 4% to 10%, well above US
Treasuries or similar government ‘safe’ securities.
• Pricing Power to Survive Inflation. Unlike those apparently safe
securities, Tobacco equities have a built in hedge against eventual inflation
with robust pricing power intact, making then an enviable investment in
uncertain times. At current levels, stocks with high dividend and cheap
valuations include MO, RAI, PM and IMT (see valuation next page). Our
Top Global Pick remains JT.
• Tobacco Outlook. Post BAT’s 2008 results, the calendar is quiet with
Imperial Tobacco's Trading Update the next scheduled source of sector
newsflow.
In the interim, drivers for the International stocks are likely to remain FX
and ever-present fears around mix deterioration, despite the profound lack
of meaningful downtrading to date.
The US market stocks have more profound drivers, with implementation
of the US FET increase at approximately $0.62/pack (+14% at retail to
premium) scheduled for April 1 and likely progress on the FDA bill by
Representative Waxman’s House committee over the next month.
Table of Contents
Weekly News Summary ...........................................................4
Company Update .........................................................................................................4
Industry Update............................................................................................................5
Regulation & Tax Watch .............................................................................................6
Tobacco Calendar ....................................................................9
Unemployment Watch............................................................10
Latest Published Research....................................................11
British American Tobacco : Q4 Solid, Well Positioned for 2009 - ALERT
(26 Feb 2009).............................................................................................................12
British American Tobacco (M) Bhd : FY08 results in line; stock to continue
outperformance on high dividends (19 Feb 2009) .....................................................14
Swedish Match : Q4 Solid, 09E Outlook Neutral – ALERT (18 Feb 2009) ............18
Philip Morris International : Momentum Intact, Concerns Addressed – ALERT
(18 Feb 2009).............................................................................................................22
Philip Morris International : Cutting Estimates on FX, Catalyst Coming?
(17 Feb 2009).............................................................................................................21
Reynolds American : Downgrade on Pension Expense, Organic Growth
Assumptions Unchanged (13 Feb 2009)....................................................................34
Reynolds American : Q4 Strength Implies Ready for 2009 Challenges - ALERT
(11 Feb 2009).............................................................................................................42
2009 CAGNY Preview : Back to Boca (11 Feb 2009) .............................................43
Lorillard Inc : Strong Finish Supports Positive Outlook (10 Feb 2009)..................48
Japan Tobacco (2914) : JTI Q4 Preparation for Robust Constant FX 3/2010 -
ALERT (10 Feb 2009)...............................................................................................54
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