fund managers: pretty good value to be had in tobacco stocks

Tobacco stocks keep smoking despite vaping threat

Tobacco stocks keep smoking despite vaping threat

Ecigarfan / Citywire / — Neil Woodford, a long time believer in the sector and now manager of the CF Woodford Equity Income fund, believes the sector currently ‘trades significantly below an appropriate valuation.’

“Demand for the product is very consistent and very predictable,” he says. “I think these stocks are made for this sort of economic environment.”

Yet in the world at large, it all seems pretty negative for the industry. Most developed markets ban advertising and smoking in public areas to a greater or lesser extent and smoking rates are dropping rapidly among adults and teenagers alike.

And then there is the rise and rise of the e-cigarette which allows nicotine addicts to get their fix far more cheaply by vaping rather than lighting up. Some 2 million people in the UK people now use electronic cigarettes and forecasts suggest US e-cigarette sales could double every year until 2018.

But Ben Russon, portfolio manager and research analyst at the Franklin UK equity team believes that generally speaking the market has already taken the negative factors surrounding tobacco into account. ‘We acknowledge that there are still some challenges ahead for the industry but we believe the market’s already priced those in.’

As for vaping, Big Tobacco’s response has been ‘if you can’t beat ‘em, join ‘em. FTSE 100 listed British American Tobacco (BAT), one of Woodford’s holdings, has labelled e-cigarettes ‘a growing market with huge potential’. In 2012 it acquired e-cigarette company CN Creative which operates under the Nicoventures name. Fellow blue-chip constituent Imperial Tobacco as has its own offerings too.

Ben Yearsley, head of investment research at Charles Stanley Direct is not yet jumping on the vaping bandwagon saying “it remains to be seen if there is a cash-cow there.”

And indeed the e-smoking market is barely regulated yet and some observers think that if the authorities clamp down, any financial bonanza may disappear before it has begun.

Back with Big Tobacco, it is actual and potential merger and acquisition activity that is driving share prices up. With US group Reynolds American, owner of the Camel brand, agreeing to snap up rival Lorillard in a mega-transaction worth $27.4bn, shares in BAT are up 10% and Imperial Tobacco is 12% stronger since the turn of the year.

According to Woodford, a successful Reynolds-Lorillard deal would benefit both companies.

BAT is a major shareholder in Reynolds while Imperial will gain from monopoly concerns which will see the new supergroup dispose of brands.

Reynolds has also agreed with Imperial that it can purchase popular US brands including Kool along with Blu eCigarettes, which should significantly enhance its US competitive positioning.