Tobacco Lights Up on Premium Blend

With most of the world in recession, expensive habits are fading fast. But international tobacco companies are still making smokers pay up for a hit.

While many consumer-products companies have capped prices, the likes of Philip Morris International and London-listed British American Tobacco are raising them. With marlboro cigarettes sale sales likely in permanent decline in some markets, producers have focused on price.

That has helped some tobacco companies smoke market expectations. PMI’s shares have risen 8% since Thursday morning, when it said higher prices had boosted second-quarter profits. In the European Union prices rose about 5%, the fastest pace in over a year, according to Thilo Wrede of Credit Suisse.

And tax laws can actually work in favor of premium tobacco companies. Many countries tax cigarettes by the pack rather than as a proportion of the retail price.

That has caused low-end cigarette prices to rise more quickly than premium cigarettes. In France, for instance, premium cigarettes online buy only cost 15% more than the cheapest option, according to Morgan Stanley’s David Adelman.

The threat of price competition has also eased after large mergers such as Imperial Tobacco’s purchase of Altadis and Japan Tobacco’s acquisition of Gallaher. A consolidated industry is less likely to start a price war.

cigarettes

Granted, the recession means some consumers are trading down. PMI has been hurt by the trend in Russia, for instance, where premium brands still cost a multiple of the cheapest. But even in Russia, PMI gained share last quarter with Parliament, an ultra-premium brand.

When consumers eventually feel richer again, companies with the most expensive brands will benefit most. PMI, spun off from Altria last year, generates more than half its profit from premium brands, according to Mr Wrede. Such brands account for about a third of BAT’s profit.

PMI trades at 13.2 times consensus 2010 earnings, while BAT commands a multiple of 11.6 times. Investors may be tempted by the cheaper option, but in the long run they should find the top drawer more rewarding.

source: http://online.wsj.com

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