The Investment Column: BAT strikes it lucky with steady market of a billion smokers

Our view: Buy

Share price: 1994p (+56p)

Tobacco stocks may not be recession-proof, but at the moment they are looking recession-resistant. The two listed behemoths of the British market, British American Tobacco and Imperial Tobacco, have traditionally been seen as defensive plays, and are continuing to post strong numbers despite a consumer slowdown in other parts of the economy.

BAT has enjoyed a strong first quarter, yesterday posting a 14 per cent bump in revenues to £2.5bn in the first three months of its financial year. It put the rise down to "improved pricing and a better product mix", as well as a favourable exchange rate, without which the revenues would have been up by only 6 per cent. This sets a good platform for what should be a strong year.

The group owns the iconic brand Lucky Strike as well as Dunhill, Pall Mall and Kent, and is pushing them strongly in emerging markets, which accounts for two-thirds of its business. As the Western market looks increasingly mature, the emerging markets are the big battleground, and BAT is well placed, currently operating in 180.

Yet there are other reasons to believe that tobacco may be good for your portfolio's health, if not that of its consumer. Despite an ever more health-conscious market and cigarette advertising banned worldwide, revenues from cigarettes are unlikely to spiral. The World Health Organisation said that despite falls in consumption levels, today's level of one billion consumers is likely to remain constant as population rates soar. In the past few years, companies have also noticed that smokers have enjoyed the benefits of a buoyant economy and traded up to premium, and consequently more expensive, brands.

Outside the closed Chinese market, BAT is the second largest group in the world, behind Marlboro-maker Philip Morris. Profits look set to remain healthy, although stellar growth will be hard as the big four increase the scrap for market share. Other opportunities to grow come through acquisitions. BAT is likely to be interested in buying the state-owned assets in Egypt, Tunisia and Algeria should the rumours they are to be sold prove accurate. BAT also has a strong focus on costs, and has continued to carry out its £800m savings plan.

In the satirical movie Thank You For Smoking the boss of a tobacco lobbyist sums up by saying: "We don't sell tic tacs, we sell cigarettes. And they're cool, available, and 'addictive'. The job is almost done for us." BAT will always have a market and good cash generation, and should rise out a consumer slowdown in the wider market. Buy.

Intercontinental Hotels

Our view: Hold

Share price: 852p (+26.5p)

Intercontinental Hotels was formed in 1946 as a division of Pan-Am, the ill-fated airline. The group reckons that because of its model, which allows independent hoteliers to use Intercontinental branding in return for a royalty, investors can see the company as a flight to quality during the credit crunch.

The company's first-quarter results show that it is in fine fettle; operating profit is up 38 per cent from £45m to £62m, while continuing earnings per share rose 47 per cent to 11.6p.

The chief executive, Andrew Cosslett, says that with 1,720 hotels already signed up to join the Intercontinental brand in the next two to three years, the group has saved about $20bn on buying or building new hotels, and has the royalties pretty much guaranteed.

All this makes the group a strong candidate for investors wanting to park their cash to avoid choppy financial markets. However, the analysts are not convinced that there is much juice left in the share price.

While Intercontinental is protected from the worst of the credit crunch, its franchisees on the ground are not. Watchers at Citigroup say that, "although we continue to value [Intercontinental's] fee-based business model, we believe [Intercontinental's] shares will struggle to outperform in the current context of a slowing global economy and worries over the consumer." They add that in a realistic sense the group's share price will not have edged much beyond 850p in 12 months' time.

Intercontinental is a sound company with a sound model, and has the advantage of a lot of future business already signed up. For investors that want to protect their money, it is a good choice, but do not expect fireworks. Hold.

Numis

Our view: Cautious hold

Share price: 190p (unchanged)

Oliver Hemsley, chief executive of Numis, the brokerage and investment bank, reckons the group has had a creditable six months; not bad in a sector that is struggling to keep its head above water as the credit crunch bites.

The group announced a mixed bag of numbers for the period up to 31 March, with pre-tax profits down £2m to £16.1m, while earnings per share rose to 15p from 12.4p.

Even Mr Hemsley says that investors would be justifiably wary of the financial sector and that there is "no great shining light" at the end of the tunnel that is the credit crunch.

For buyers wanting to avoid the financial services, Numis is a sell. But relative to others in the sector, the firm looks cheap. Analysts at Fox-Pitt Kelton say that "with uncertainty surrounding stockbroker's earnings in the current market environment, we would expect investors to increasingly look at the balance sheet for valuation purposes." They add that the group is valued at 1.7 times its tangible book value, against the sector average at 1.9 times.

Numis will perform well when financial markets return to health. With no indication of when that will be, investors with no attachment to the sector should tread carefully. Cautious hold.