British American Tobacco’s smoking 2015

British American Tobacco saw constant currency revenue increase by 5.4% in 2015 and earnings per share rose by 10%. A key driver was the increased contribution from the group’s 42% stake in Reynolds American. On a reported basis earnings per share was unchanged due to ongoing currency headwinds.In the book Barbarians at the Gate, which covers 1980s Wall Street deal making, Warren Buffett stated that:“I’ll tell you why I like the tobacco sector. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.” (Page 218)Increasing regulation has also strengthened the barriers to entry facing new competitors. An inability to advertise in most markets would make it nigh impossible for a new business to make headway in the tobacco industry.The existing players have also undertaken consolidation in order to generate economies of scale and enhance profit margins. A side effect of increased concentration has been a reduction in the intensity of sector competition.While tobacco is a high return business it is also experiencing a slow decline in volumes. However, growth in premium Western brands and emerging market volumes offer some support.Four of British American Tobacco’s five Global Drive Brands