BAT Keeps Waning Cigarette Volume in Check to Beat Estimates

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British American Tobacco Plc, the maker of Lucky Strike and Pall Mall cigarettes, reported first-half earnings that beat estimates as a smaller-than-expected decline in cigarette sales helped offset the strength of sterling.

Adjusted profit from operations fell 6 percent to 2.51 billion pounds ($3.9 billion), the London-based company said in a statement Wednesday. That compared with the 2.44 billion-pound average estimate in a Bloomberg survey. Excluding currency fluctuations, profit rose 1.3 percent.

“It’s a quality beat, they have beaten on top and bottom line,” Martin Deboo, an analyst at Jefferies LLC, said by phone. “BAT has avoided the embarrassment of reporting falling margins for the first time in as long as I can remember.”

BAT’s profit has remained resilient despite the waning popularity of cigarettes worldwide and the strength of sterling, which has been the best-performing developed-market currency over the past six months. The company’s $4.7 billion investment to retain its stake in the enlarged Reynolds is also paying off. Reynolds shares made their biggest gain since 2008 yesterday after the company boosted its earnings forecast.

In the first half, BAT sold 322 billion cigarettes, a decline of 2.9 percent. The company estimates the industry saw volume decline by about 3.5 percent.

The operating margin was unchanged at 39.2 percent of sales as cost reductions offset negative currency effects.

BAT shares rose 2.8 percent to 3,652 pence in early London trading, the second-biggest gain in the U.K.’s FTSE 100 Index.

“The underlying performance of the business remains strong and we are confident that we are on course to deliver an improved second half, leading to another year of good earnings growth at constant rates of exchange,” Chairman Richard Burrows said in the statement.

BAT will pay an interim dividend of 49.4 pence a share, up 4 percent on the prior year and matching Bloomberg’s forecast.

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