Investment Column: BAT carries a health warning for investors

Laird; CSR


Our view: Hold

Share price: 2,405.5p (-32.5p)

Tobacco is one of the most defensive sectors in a downturn, for one simple reason. Smokers, particularly in the emerging markets, typically refuse to give up their habits, irrespective of how much companies raise prices.

Certainly, the shares of British American Tobacco (BAT), the world's second-largest quoted tobacco group, have put in a great performance over the past year. The price remains a little off its 12-month high of 2,490p earlier this month, despite a sell-off yesterday when the City was spooked by comments from BAT's chief executive that the "recession's impact on consumers is still with us and shows no sign of abating".

These "challenging" global conditions have led to lower industry volumes in countries including Romania, Turkey, Pakistan and South Africa. Sales also suffered from illicit trade and the loss of sales following floods in Pakistan. This saw underlying volumes tumble by 3 per cent, worse than was forecast by City analysts. That said, BAT grew its market share in its top 40 locations, boosted by strong sales of Kent, Lucky Stripe, Dunhill and Pall Mall cigarettes. It gave investors a further boost by revealing price increases and said it was focusing on cost-cutting. However, shares in BAT are starting to look pricey and they trade on a 2011 price-to-earnings ratio of 12.4. We do not doubt that BAT will continue to bring in profits and be a reliable share for years to come, but for now, investors should treat them like a mild health warning.

Laird

Our view: Hold

Share price: 149p (-3.1p)

Laird put out a solid trading statement yesterday that showed the electronics company recovering from a harrowing 2009, when business fell through the floor in the wake of the financial crisis. The company, which makes electromagnetic shields, antennae and other parts for products such as computers and mobile phones, also had to recover from losing a big chunk of business from Nokia. That's a big client and the Finnish giant's decision forced Laird to stop making handset mechanisms (the bits that slide out of mobile phones). Total sales for the third quarter of 2010 were £141m, an increase of 16 per cent after the handset-mechanisms business was stripped out. Combined with tight cost controls, revenue growth drove the operating margin close to double digits, which cheered analysts.

The shares have had a good run recently, rising by 40 per cent since July's first-half results, and are trading at about 13 times their estimated 2010 earnings. After the big cut announced in March, the dividend yields about 4 per cent – a respectable base for the progressive payout policy that the company is aiming for.

Laird's chief executive, Peter Hill, points to its broad product range and more diversified customer base, low-cost manufacturing and presence in fast-growing emerging markets as strengths of the business. We agree, but Laird is still a business in transition and so we are sticking to the hold recommendation that we gave to the company's stock in March.

CSR

Our view: Buy

Share price: 309.6p (-10.3p)

The UK semiconductor industry is in rude health, although investors do not always see it that way. Yesterday, Cambridge-based CSR announced a 10 per cent bump in third-quarter revenues but the disappointing guidance – mainly because of its lack of presence in the smartphone market – saw the stock smashed 10 per cent.

CSR is also expecting a weaker fourth quarter. Yet operations look set to improve next year and its new partnership with Infineon is expected to boost sales of its Bluetooth and Wi-Fi chips next year. Ex-cash, the stock is on a price of seven times 2011 earnings, and the fall in the share price looks like a buying opportunity.

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