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Your Money > Investing Comment Articles > Fall bar none
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By Richard Hunter, Hargreaves Lansdown Stockbrokers
July 1st marked the one year anniversary of the smoking ban in England. Since the move had been widely flagged in advance and since the affected companies had time to prepare their response to what was going to be a difficult time, surely the shares in question have since had a decent run? Not for a moment. To begin with, July 2008 looks very different from July 2007. In the intervening period we have had the US sub-prime crisis and fallout, the ensuing credit crunch, global inflationary pressures particularly from oil and food prices, and difficult interest rate questions to be asked. In addition, the US remains undecided about the fate of its own economy in the short term, whilst in the UK there are almost daily updates of evidence - most notably from the property market and the weakening of consumer sentiment - that the economy is about to enter a period of some difficulty. In terms of the pub sector, many did indeed prepare as best they could for the smoking ban. Clearly food in the pub was going to take on more significance, whilst outdoor purpose-built areas for smokers were hastily put in place in an attempt to retain the old customers, whilst attracting the new ones, such as families. But then events began to conspire against them. Food prices (for global reasons which could hardly have been foreseen) soared, whilst the supermarkets stepped up the pressure in offering cheaper alcohol for those who were content to carry on drinking at home. At the same time, one of the central themes to supporting pub shares was the extensive property portfolios which many of them owned, and how some of this value might be released, either through sale and leaseback schemes, or by converting to Real Estate Investment Trust, or REIT, status. Whether any of these companies chose to commit to REIT status or not, the subsequent downward pressure on property prices really made its presence felt. For the bingo operators, things became just as difficult. The smoking ban was accompanied by the Gambling Act which limited the number of gaming machines the bingo halls could operate, even if the government is promising to rescind some of this law to help an industry in crisis. And how these companies have been affected - just taking a random selection, share price falls have been as follows - Fuller Smith down 42%, Enterprise Inns 41%, Rank 57%, Greene King 54%, JD Wetherspoon 64%, Punch Taverns 75% and Mitchells and Butlers 77%. There have reportedly even been other sectors which perhaps a little more surprisingly have also fallen foul of the ban, such as the dry cleaning companies, which have found that smoke-free pubs has reduced the individual's need to launder clothes. It is of some irony that the tobacco companies themselves have largely avoided this carnage. The economists love to refer to cigarettes enjoying "inelastic demand", that is, consumers will continue to buy them regardless of the price (or indeed obstacles put in front of them, such as the smoking ban). Equally, many of the tobacco companies have moved operations to cheaper overseas destinations, whilst at the same time targeting those less developed countries where smoking is actually on the increase. The likes of Imperial Tobacco and British American Tobacco continued to be regarded as strong defensive shares, given this inelasticity of demand and their strong, stable cashflows. The share prices have also been reasonably resilient, with Imperial more or less tracking the wider FTSE100 over the last year down some 18% or so, whilst BATS has managed a creditable rise of 2% over the same period. Market consensus remains positive on both, with Imperial being the slightly preferred of the two. Perhaps there is a lure of the property portfolios recovering in the longer term, and perhaps there is a hope that the pub companies will be able to strengthen their food offerings and therefore improve their offerings over time. In addition, there is also the possibility of industry consolidation as the large become larger at the expense of the more traditional pubs - which may go towards explaining why the market remains obstinately positive about some of these companies' prospects. For the record, amongst the more favoured in terms of the general market view are Greene King (strong buy), Punch Taverns (buy), Marston's, Enterprise Inns and JD Wetherspoon (strong hold). In the meantime, as with so many other areas within the economy at the present time, risk averse investors will not yet be wading back into these related sectors where the dust has yet to settle fully. Useful links: |
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