2 Worrying Reasons To Shift Out Of British American Tobacco plc

Royston Wild looks at why British American Tobacco plc (LON: BATS) could be a hazardous stock selection.

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In recent days I have looked at why I believe British American Tobacco (LSE: BATS) (NYSE: BTI.US) could be set to deliver stunning shareholder returns (the original article can be viewed here).

But, of course, the world of investing is never a black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, weigh heavily on British American Tobacco’s investment appeal.

Emerging currency weakness a concern

British American Tobacco’s enviable stable of Growth Brands has enabled the firm to keep revenues moving higher despite market weakness. Still, investors should be aware of the escalating impact of currency weakness in developing regions on earnings.

At constant exchange rates turnover increased 4% in 2013, to £15.8bn. But taking into account rate movements these rose just 0.5% from 2012, to £15.3bn. In particular, British American Tobacco noted that “results were… impacted by the weakness against sterling of some key currencies, notably the Brazilian real, South African rand, Japanese yen and Australian dollar.”

british american tobacco / imperial tobaccoThe tobacco play currently sources around three quarters of total sales from emerging markets, regions which are becoming increasingly important as demand from traditional Western geographies languishes — sales from Asia Pacific, Eastern Europe, the Middle East, Africa and Latin America all continue to surge higher.

With this in mind, I expect a backdrop of rising inflation and economic slowdown in these key territories to become increasingly problematic for British American Tobacco’s bottom line.

Legislation threatens e-cigarette potential

The electronic cigarette market has been touted as a potential saviour of the tobacco industry. The new technology allows nicotine consumers to enjoy their fix without, at first glance, having to endure the obvious health implications associated with traditional tobacco products. Such concerns have dented cigarette demand significantly in recent times.

However, the tide of legislative action is also turning against the e-cig market. Earlier this month Los Angeles followed New York, Chicago and Boston in banning use of the products in public places, as fears over the long-term effect of e-cigarettes remain unknown and officials look to curtail second-hand vapour inhalation.

And in February a final European Parliament draft governing the new products was passed, which from 2016 will limit nicotine concentration in the new products; ban all advertising of e-cigarettes; and require health warnings on packaging. Although the draft is still to be signed off by member countries, a number of key markets across the globe are tipped by many introduce similar measures.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in British American Tobacco.

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