The tobacco industry is currently going through its biggest change in a generation. That’s because new lower-risk products are becoming increasingly popular, with e-cigarettes being the most obvious example of changing consumer habits. And with the e-cigarette market being worth billions and growing at a rapid rate, it could provide a turbo boost to the earnings of British American Tobacco (LSE: BATS).
Certainly, British American Tobacco is being hurt by falling cigarette volumes. This is the same for the entire industry, but with tobacco companies having tremendous pricing power they’re able to offset volume declines with price rises. Looking ahead, this situation looks set to continue over the medium-to-long term and when combined with the potential for growth within the e-cigarette and reduced risk segment, British American Tobacco’s earnings have a bright future.
With the company trading on a price-to-earnings (P/E) ratio of 17.7, it seems to offer good value for money given its growth prospects and excellent defensive profile. Therefore, buying British American Tobacco right now could be a sound move.
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Sound long-term buy
Similarly, Royal Mail (LSE: RMG) has significant future potential. Like British American Tobacco, one aspect of its business is struggling but this is set to be offset by strength elsewhere. So while Royal Mail’s letters business continues to offer a challenging long-term future, its European operations offer upbeat growth prospects.
Furthermore, Royal Mail trades on a relatively attractive valuation which indicates that it offers a generous margin of safety. For example, it has a P/E ratio of just 12.9 and this indicates that there’s upward rerating potential. And with Royal Mail having a yield of 4.5%, it remains a very enticing income play.
Certainly, there’s work for management to do in terms of making the business more efficient and improving its near-term performance, but for long-term investors it remains a sound buy.
Scope for rising dividends
Meanwhile, textile services specialist Johnson Service Group (LSE: JSG) has had an excellent recent period with its shares rising by 481% in the last five years. During this time the business has made significant changes and this seems to have paid off, with double-digit growth in earnings being recorded in each of the last three years.
Looking ahead, further growth of 9% is forecast for the current year, with 10% growth being pencilled-in by the market for next year. This puts Johnson Service Group on a price-to-earnings growth (PEG) ratio of only 1.3, which indicates that there’s capital gain potential on the cards. And with Johnson Service Group paying out only a third of profit as a dividend, there seems to be considerable scope for a rise in the company’s 2.3% yield.
