Investment Column: BAT comes without a wealth warning

Rolls-Royce Group; Lonmin
  • @AlistairDawber

Our view: Buy

Share price: 1,690p (-129p)

The adverts used to tell you that smoking was good for your chest. Even though that bit of marketing turned out to be somewhat suspect, if someone tells you that tobacco stocks are good for your wallet, the advice would not have to come with a health warning.

British American Tobacco published its third-quarter update yesterday, showing that pre-tax profits were up at £992m, an improvement on the £847m reported at this time last year. Of course, it is not just credit crunch-stressed executives that are boosting BATS: while cigarette sales in the West are falling, revenue from emerging markets is more than plugging the gap. Analysts at Evolution are certainly fans: "BAT has consistently delivered solid and consistent earnings and dividend growth over virtually any time period that you could choose. Boosted by currency translation BAT should deliver near 13 per cent compound annual growth rate earnings per share growth and 15 per cent compound dividend growth over the period 2008 to 2010. In an uncertain economic outlook that growth should give investors considerable confidence."

It is the last sentence that really is the clincher. BAT shares are not cheap, but in the kamikaze markets of the past 12 months the group's stock has dropped by less than one per cent, showing investors that the tobacco sector in general, and BAT in particular, is a good place to protect one's money.

There is the usual ethical consideration, of course. BAT's fastest growing markets are the ones in which they are not required to go to the same lengths to warn customers about the dangers of tobacco, as they are in the UK, where the number of people smoking is falling. And they do not volunteer to do so. However, for buyers unconcerned by such niceties, BAT continues to be a gilt-edged stock. Buy.

Rolls-Royce Group

Our view: Buy

Share price: 314.25p (+26.25p)

Updating the market yesterday with a terse statement, Rolls-Royce said that "trading activity across all four of the group's businesses has been good". Despite the brevity, analysts were nonetheless content, especially with news that the company has added £5bn worth of orders since the end of June. The market was evidently impressed too, with the shares closing up 9.1 per cent.

Even though the company refuses to say what challenges it faces next year, the fact is that Rolls-Royce is in as good a position as any other heading into a downturn. Analysts at Numis point out that, trading on a 2009 enterprise value to Ebitda of 3.7 times, the group offers "exceptional value for those investors able to take a slightly longer term view for a high-quality, resilient business with market-leading technology and a strong financial position".

The watchers point out that in the shorter term, the "jittery" market could lead to a spot of volatility, but the consensus among the experts is that Rolls-Royce is not a bad place to park your cash. Those at house broker Royal Bank of Scotland, who felt compelled to persuade clients that the update was not boring, point out that, "we are focused on companies that may well emerge the stronger from the 'credit-crunch' and are able to weather the storm while paying a good dividend and pursuing their strategies in an unfettered manner. Rolls-Royce fits that bill, in our view".

There was precious little in the update about Rolls-Royce's expectations for 2009, but the group does seem to have established a defensive position for the time being. Investors will increasingly come to depend on groups like that in the coming months and now would be a good time to start. Buy.


Our view: Sell

Share price: 1,120p (+44p)

It has been a topsy-turvy old year for investors in the platinum miner Lonmin, which yesterday published its full year production report. Buyers were cheering in August when the shares vaulted by more than 120p as its rival Xstrata unveiled a $10bn bid for the group, which was subsequently rejected by the Lonmin board. Since then, however, platinum prices have fallen and the stock has fallen off a cliff.

The shares were up 4.1 per cent yesterday as the group reported that production was in line with what it had previously said.Watchers at Evolution moved their recommendation from buy to sell, warning that, "we have sliced our [platinum group metals] forecasts for 2009 that now result in Lonmin's earnings collapsing to 13 cents a share". Sell.