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Performance drag: why Saracen has stubbed its last tobacco stock
on Sep 24, 2013 at 14:23
This new source of uncertainty is still at an embryonic stage; the companies are all developing their own products as the industry has acknowledged the emergence of a new competitive category.
The tobacco industry currently earns super margins given the barriers to entry and minimal advertising spend; the advent of e-cigarettes could see a radical reduction in such a level of profitability.
Leaving aside the rock-bottom scores on our SRI ratings, we were always reluctant investors in tobacco stocks. While we recognised their income attractions, we were never comfortable investing in businesses which relied on cost savings and price inflation rather than underlying organic revenue growth.
The sector has enjoyed a steady re-rating over recent years and is now valued at similar multiples to, for example, global pharmaceutical companies which have both growing revenues and cash flows.
We believe that analysts and investors have become complacent when looking at the sector. The challenges facing the sector are intensifying; e-cigarettes offer a novel and potentially profound shift in the industry’s dynamics.
Our portfolio comprises a host of global leading companies with sustainable growth characteristics which are not struggling to cope with the structural threats dogging tobacco companies.
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