Can pandemic boost to these two ‘sin stocks’ continue?

Smoking and gambling rates have gone up during Covid-19, proving these stocks do well during hardship.

The stock market theory that sin stocks do well in times of hardship was given a pandemic twist today by evidence of a home working boost for tobacco stock Imperial Brands (LSE:IMB) and gambling group GVC Holdings (LSE:GVC).

The current social restrictions mean gamblers and smokers are likely to have more time and spare cash to engage in their respective habits, with Ladbrokes owner GVC today lifting its profit forecasts on the back of a surge in online sports bets and casino gaming.

Imperial is likely to have been boosted by smokers now being free from the usual workplace restrictions about where they can light up. And like many other consumer-focused industries, the cancellation of holidays means there's now more money to spend on cigarettes.

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Imperial said in a statement today that the Covid-19 related changes in consumer behaviour had increased demand against its original expectations, with tobacco revenues for the year to 30 September now likely to be 1% higher. This compares with a market forecast for a figure 0.4% lower.

The stronger-than-expected volumes have been in several key European markets and in the United States as consumers appear to have “allocated more of their spend on tobacco”.

The positive trends for the JPS and Gauloises maker have helped to offset weaker market volumes in the duty-free channel and in some traditional summer tourist destinations.

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They have also offset a disappointing performance from Imperial's portfolio of next generation products, which include vaping brand blu. Net revenues in the division are expected to be about 30% lower after Imperial significantly reduced investment earlier in the year.

Across the group, earnings per share at constant currency will be down by around 6%, which is in line with current market expectations.

Analysts at Jefferies said the update set up the company nicely for the 2021 financial year, where the broker sees a strong case for a sizeable re-rating. It has a price target of 2,139p, compared with 1,369p seen today after a 5.5p rise in the wake of the update.

Shares have so far failed to live up to the sin stock theory, having fallen from January's high of above 2,000p to about 1,246p at the start of last month. This follows the 33% cut in interim dividend delivered in May, when the cigarette maker set about prioritising its £14 billion debt mountain and bracing itself from a potential hit from Covid-19.

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Despite the cut, which was the first in the company's 24-year stock market history, Imperial remains attractive to income investors with a yield that has been around 8%. New chief executive Stefan Bomhard has been reviewing the company's strategy over the past three months and is expected to update investors on his thoughts at a capital markets day on 17 November.

Jefferies thinks this event could be a positive catalyst for sentiment, particularly if there's information about additional divestment plans or expansion into medicinal cannabis.

The broker believes the company's core offering is under-appreciated by the market, which it also thinks has written off the chance of a surprise to the upside in vaping. Imperial's focus in next generation products is now on improving performance, returns and capabilities.

Morgan Stanley, which has a price target of 1,593p, said the recent decisions made by the company's management were positive in the long-term, but that for now it continues to prefer rival British American Tobacco (LSE:BATS) over Imperial.

It added: “Imperial continues to fall behind peers on next generation products and we see execution challenges across the portfolio, pending a new business strategy.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.