Credit Suisse downgrades Imperial Brands, cuts target price

Strained consumer finances and the prospect of stiffer competition in the value segment of the market meant that Imperial Brands's shares were trading at too narrow a discount versus those of British American Tobacco, Credit Suisse said.

Above all, the typical smoker's expenditures on cigarettes had risen to more than 15% of their discretionary income in several developed markets, analyst Alan Erskine said in a research note sent to clients.

Hence, demand was becoming increasingly sensitive to higher prices.

That was especially bad news for Imperial due to its geographical footprint.

Imperial was also "over-represented" in the value segment of the market, according to Erskine.

Tougher rivals in that segment of the market would lead to a 500 basis point reduction in the rate of growth of both companies' profits over the medium to long-term, the broker said.

In parallel, the FX-related pressures on British American Tobacco's profit margins were set to diminish.

Erskine downgraded his recommendation on shares of Imperial Brands to 'neutral' (and lowered his target price from 4,250p to 4,000p) while reiterating his 'outperform' stance on British American.

The target price on the latter's stock was bumped up to 5,200p from 5,050p.