Must read weekly preview: British American Tobacco, US jobs report

British American Tobacco trading statement – Tuesday 2 June

Richard Hunter, Head of Markets, interactive investor says, “British American Tobacco is continuing to position itself to reflect the changing landscape of smokeless products, while navigating an ever-growing number of hurdles. The pressure on traditional tobacco products has been in evidence for some considerable time, driven both by changing lifestyle habits as well as increasing regulation. There have been several instances of governments toughening their stance on tobacco sales, especially to youngsters, which adds to the burden of regulatory censure which has plagued the sector over recent years. In addition, and quite apart from this general decline in traditional tobacco products sales as health issues come to the fore, there is a reluctance among some investors to invest in the sector at all on ethical grounds.

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For BATS, these issues are in sharp focus. The group previously announced a provision of £6.2 billion to settle legal claims in Canada, some of which has now been released, positively distorting the profit number. Even so, whether this is the thin end of the wedge remains to be seen, and the ruling is in addition to the likes of Australia and Bangladesh, where regulatory headwinds and significant excise increases have hampered performance. Elsewhere, the sale of illicit vapour products in the US has already crimped profits in this major market, although BATS is hopeful that the early signs of Federal and State enforcement will mitigate this issue in due course.

The need for a long-term replacement for traditional combustible products has left the tobacco majors needing to move from a standing start and, after some years of development, the New Categories business is showing some meaningful progress. Such products now account for 18.2% of overall revenues, with an ultimate target of 50% as the group aims to become a predominantly “smokeless” business by 2035, while adding 4.7 million customers in the full year results announced in February, upping the current total to 34.1 million.

The successful launch of Velo Plus in the US, which is the largest market for BATS at 45% of revenues, contributed to sales growth of 5.5% over the year at constant currency. For New Categories as a whole, double-digit revenue growth in the second half propelled the full-year outturn to a positive 7%, with BATS noting a 77% increase in contribution to the group to £442 million. This also enabled the announcement of a further £1.3 billion share buyback programme in addition to the group’s progressive dividend policy, where the projected yield of 5.1% is punchy by any standards and is adequately covered.

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BATS has also maintained its forecast for the coming year, with revenue growing within a range of 3% to 5%, underneath which the group expects low double-digit growth in New Categories, leading to a jump in adjusted profit of between 4% and 6%. This comes against global tobacco industry volumes that are expected to fall by 2% this year.

Set against these tides of turbulence, investors have been handsomely rewarded of late for their patience, notwithstanding that the price remains some 14% shy of the record 2017 levels. The shares have risen by 45% over the last year and by 99% over the last two years. The group is continuing to record prodigious cash generation, which enables a generous shareholder return focus, reduction of debt and investment in transitioning the company. A slightly stretched valuation does little to upset prospects.”

US jobs report – Friday 5 June

Victoria Scholar, Head of Investment, interactive investor, “Next Friday brings the latest US jobs report which will provide clues about the strength of the labour market.

After recent strong readings of 178k and 115k in March and April respectively, the nonfarm payrolls figure is likely to slow further, with consensus expectations for a read of around 100k. However, there is a real possibility that the figure could come in softer as payrolls have been extremely volatile this year - a methodological change to how payrolls are calculated by the US Bureau of Labor Statistics has amplified month to month swings.

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There have already been several signs that the Middle East conflict is starting to take its toll on the jobs market as momentum slows. There have been some weak leading indicators of labour market demand, specifically job postings and vacancies as well as some disappointing surveys like PMIs and business leaders’ expectations. US claims for unemployment benefits rose by 5,000 to 215,000 this week, worse than expectations for an increase of 1,000.

Businesses are becoming increasingly cautious about taking on the long-term fixed cost of hiring full-time staff amid the inflationary backdrop brought about by this year’s energy shock - US PCE inflation hit a three-year high this week. So far, however, the economy has been spared widespread job losses. Therefore, the unemployment rate is likely to remain unchanged at 4.3%, particularly as the downtrend in labour force participation has helped keep a lid on the rate.”