The investing merits of British American Tobacco (LSE: BATS) (NYSE: BTI.US) have often been outlined. But one thing I think is frequently over-looked is that BAT is really a fast-moving consumer goods company.
So if you are examining its merits, why not compare it with, not just other tobacco companies, but other FMCG companies — for example, Unilever (LSE: ULVR) (NYSE: UL.US). So this article will compare and contrast the investing merits of BAT and Unilever.
Before I proceed any further, I should briefly mention the health effects of tobacco. My view is that the question of whether you should invest in a tobacco company is similar to the question of whether you should smoke — it’s a question of freedom of choice. There is no need to invest in tobacco if you have qualms about it.
One company has twice the market cap of the other: can you guess which?
BAT is a company that is steadily growing, with much of its growth from emerging markets. Unilever is also forecast to grow steadily, and again most of its growth will be from emerging markets, but Unilever’s P/E ratio is higher.
So these companies are more similar than you think. But I bet you didn’t know that BAT has a third of the number of employees that Unilever has. And that BAT has twice the market capitalisation of Unilever. This underlines the high profit margins of BAT, its pricing power, and the strength of its brands, adding up to a high economic moat.
Which company would I invest in?
Tobacco is quite a niche industry, with high barriers to entry, whereas many of Unilever’s markets have low barriers to entry — many companies make shower gels, shampoos and washing liquid. That’s why, although Unilever has a research and marketing machine few can match, it is not as profitable as BAT.
On the other hand, BAT is likely, eventually, to be more highly taxed and regulated globally. So, over the very long term, its growth is likely to slow. This may explain why it is on a lower rating than Unilever.
So which company would I buy? Examine the long-term chart for both BAT and Unilever and we see that the share prices of both companies have practically doubled recently. So both companies look rather pricey to me at the moment, and, although BAT and Unilever are strong companies which are likely to grow into the future, I can find cheaper shares in the stock market at the moment.
