Long-term questions cloud British American Tobacco and On The Beach goes all-in to hoover up Thomas Cook customers

“UK, European and Asian stocks have followed the lead from the US last night with small gains across most of the major indices.

“The FTSE 100 jumped 0.3% to 7,425 with notable gains from some of the banks, miners and telecom stocks. Helping to support the index was a small rise in the value of the US dollar against the pound, thereby benefiting companies with sterling denominated share prices who earn revenue overseas,” says Russ Mould, Investment Director at AJ Bell.

British American Tobacco

“Is a stricter regulatory environment on vaping in the US benefiting the established tobacco firms? That’s the message British American Tobacco is pushing this morning alongside a year end trading update.

“The argument in favour of this view is that youth-orientated upstart brand Juul, which had stolen a march on its larger rivals, is being stopped in its tracks amid a crackdown to tackle an apparent vaping-related health crisis among young Americans.

“What’s less clear is how British American Tobacco can avoid running into the same problems – after all its peer Imperial Brands warned on profit in September, at least partly due to the push-back against vaping.

“Sales from so-called ‘New Categories’ at British American Tobacco are certainly being affected in the short term with growth expected to come in at the lower end of the guided range.

“The company seems to be doing a good job of managing its portfolio of more traditional products for now, hence overall growth coming in towards the top end of guidance in terms of revenue and profit, but long-term trends show demand for cigarettes is running out of puff.

“Investors are likely to be watching the performance of New Categories, which include items such as tobacco-free oral nicotine products alongside e-cigarettes, closely in 2020 to see if the company’s optimism is justified. If not, questions over its longer term strategy are likely to gain even greater urgency.”

On the Beach

“Thomas Cook’s collapse has had a positive and negative effect on holiday seller On The Beach.

“On one hand the failure of the UK travel agent has caused On The Beach’s pre-tax profit to slump because it had to incur extra costs of helping customers who were previously booked to fly with Thomas Cook find alternative travel arrangements or providing refunds.

“On the other it has removed a player which had a 20% market share of beach holidays and airline capacity to beach holiday destinations. This creates a ‘once in a lifetime’ opportunity to grab some of this market share which explains why On The Beach has flagged a desire to spend more money on marketing and keep its prices competitive in order to scoop up more customers.

“That sounds a fair strategy but On The Beach won’t be the only one with this idea. We already know that airlines have been racing to increase capacity to capitalise on this opportunity and so holiday sellers will naturally be doing the same. For example, EasyJet has already flagged that it will give its package holiday business another push.

“On The Beach will have to spend money to make money which is likely to see its costs go up in the short-term. The key measures of success will be the time it takes to make a return on this investment and whether it can hold on to any new customers beyond a single holiday booking.”

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