British American Tobacco (BAT) has had an extraordinary run since 2008 and has potential to test further highs in the short term. As a defensive pick, the tobacco industry has historically been resilient in tough economic times and with investors looking for some stability in a highly volatile market, BAT has definitely secured good gains for many of its devotees. With the rand appearing to be weak in the medium term, and BAT being a rand-hedge stock, we expect it to deliver continuous strong earnings in the future.
Despite all the anti-smoking laws and law suits repetitively thrown in their direction, BAT has shrugged off all bad publicity and has forged ahead. The tobacco industry is always attacked for its companies’ ethics, notwithstanding all the rivalry between them. This is illustrated by the recent allegations made by Business Times that BAT was spying on rivals as part of its battle to thwart the R5bn illegal cigarette industry. BAT apparently overstepped the mark, breaking a number of laws in South Africa and the UK. But the unpleasant truth about BAT is that it sells products that are highly addictive. Smokers are reprised users and have high levels of brand loyalty – meaning that tobacco consumption is fairly stable – making BAT a highly cash-generative, defensive investment. BAT is also vastly diversified, both geographically and across its range of brands that vary from premium to value cigarettes, which further protects its earnings from changing economic conditions. This company is a major global player – only five competitors control around 80% of the world’s tobacco market.
With all the international anti-smoking laws in place and the strict restrictions on advertising and marketing, BAT commands immense pricing power to compensate for declining sales. However, with the regulatory and legal issues that come with selling a product that is harmful to people’s health, some countries are considering the adoption of plain packaging to further curb demand. Yet BAT is still on the rise, and with a f lag pattern currently in the making, we anticipate further upside in the short term. POSSIBLE SCENARIO: A move through the 64 465c/share resistance level would confirm this bullish continuation pattern, and BAT would return to its previous bull trend. But the relative strength index (RSI) must simultaneously abandon its bear trend. The upside target of this breakout would be at 78 820c/share – achievable in the short term (one to six months). ALTERNATIVE SCENARIO: The f lag pattern would persist below 62 300c/ share. But breaching the lower slope would steepen the bear trend towards the 59 355c/share support mark.