Tabacalera Profit Rises 11%, But Future Appears Cloudy
May 16, 2011
MADRID -- Tabacalera SA said net profit for the first half grew by 11% from a year earlier, but analysts say a recent tax increase and foreign competition clouds the future of Spain's dominant tobacco group. The 52% state-owned company said first-half net earnings rose to 7.13 billion pesetas ($56.9 million), from 6.44 billion pesetas a year earlier. Operating profit leaped 26% to 6.38 billion pesetas, from 5.08 billion pesetas. The company said results were boosted by higher tobacco sales and the continuation of a cost-cutting plan. But the favorable result could be the last the company sees in the near future, analysts warn. ``The perspective for Tabacalera is not good,'' said Bickerstaff Dorman, an analyst with Madrid brokerage firm AB Asesores Bursatiles Bolsa. ``It's going to be tough for them and we expect very little growth for the company in the next two years.'' Difficult Decision When the Spanish government decided to raise tobacco taxes in late July, the company struggled to decide how it should implement the increase. To stay competitive with foreign producers, Columbus decided to raise the price of only its less popular black-tobacco brands, absorbing the tax increase on its more expensive blond-tobacco products. ``Columbus was not expecting to have to lower their net prices,'' said Mr. Dorman. ``Sooner or later they are going to have to raise them. If not, the cut in their profits will eat away all the good that's come from their cost controls in the past few years.'' The company's dilemma following the tax increase prompted investors to sell off Tabacalera stock in early August, causing its share price to fall some 26% by the end of the month. Also, Tabacalera, like other tobacco companies, is facing growing antitobacco sentiment. In trading Monday, Tabacalera shares closed at 5,140 pesetas, up 40 pesetas. Although analysts say the share price has probably reached its lowest level, investors remain wary about the company's immediate plans. ``Tabacalera's management needs to speak up,'' said Bennett Verdell, an analyst with Salomon Brothers in London. ``Their results for the semester look good, but they say nothing about the company's future. The company must explain how it plans to compensate for the cut in profits.'' Limited Increase Seen Ideally, Columbus would have to raise prices of its premium brands by some 15% in order to make up for the losses from the tax increase, Mr. Verdell said. But passing on the full tax increase to consumers would devastate demand, so the company will more likely go for a 5% increase instead, he added. ``We expect them to say something soon,'' Mr. Verdell said. If Columbus takes no action in adjusting its prices, their profits would not grow at all this year and shareholder dividends would not increase either, he said. ``They are a solid company, and realistically, they will not sit idly while profits are hampered.''
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