Who's Serving Up Smoking Results?

With British American reporting results on a nine-month basis, we're
somewhat comparing apples and oranges, especially since the company
didn't report profit or revenue numbers. But British American's volume
results were still roughly in line with those of Philip Morris: a 2%
increase in overall volume growth (including acquisitions), but a 3%
decline excluding acquisitions. Compare that with Philip Morris
International's overall volume drop of 2.9% (a 4% decline without
acquisitions) in last week's earnings release.

While Philip Morris experienced a 4.3% volume drop for flagship
brand Marlboro, British American saw 4% overall volume gains for its
four "Global Drive Brands," including:

• 9% growth for Pall Mall
• 5% growth for Lucky Strike
• 6% growth for Dunhill

So British American appears to be weathering the economic storm well enough.

More impressively, British American stated that the company
delivered revenue growth with and without currency considerations
(although it didn't specify whether this was organic or due to
acquisitions). In comparison, Philip Morris International reported a
5.3% revenue decline on the quarter, and a 1.4% decrease in operating
income, while revenue would have grown 6.9% without adverse currency
fluctuation.

As global excise taxes on tobacco products continue to rise, the
cigarette producers have their work cut out for them in protecting
profits in spite of declining volume. Smaller producers such as Vector Group (NYSE: VGR) could be particularly at risk as consumers decide how much they're willing to pay for a cigarette break.

Domestically, Altria hasn't fared much better, with declining sales and volume owing in part to rising excise taxes, while Reynolds American (NYSE: RAI) also reported an 11% volume drop. On the other hand, Lorillard (NYSE: LO) served up a better-than-average 6.1% volume decrease even as it showed a 2.6% increase in operating income. British American Tobacco holds a 42% stake in Reynolds American.

While the tobacco market isn't growing
in the U.S. now, consumers here aren't completely scared off by
increased excise taxes. Similarly, global tax increases are just
beginning to unfold. And while those taxes are not likely to kill the
industry, global consumers are increasingly turning to gray- or
black-market smokes as a result of increased excise taxes, leaving
growth prospects for premium products like Marlboro in some jeopardy.

For related Foolishness:

• Is This Sector Going Up in Smoke?
• Is Philip Morris Lost in Translation?
• The 4 Secrets of Top Stocks

© 2009 UCLICK L.L.C.