As we had anticipated, British American Tobacco's first-half results were boosted by favourable exchange rates and acquisitions made in 2008, and we are maintaining our fair value estimate. The firm managed to offset lower volume by raising prices in many markets, and on an underlying basis, we think the firm is holding up quite well given the continued retrenchment of the consumer across the globe.
Excluding the effects of currency and acquisitions, revenue increased 7% from the first half of 2008 as a result of price increases in many markets, but volume slipped 2%. The firm noted, however, that the greatest volume declines were seen in the discount category, leading to a minor mix benefit. In line with other consumer staples firms, British American reported seeing weakness in Eastern Europe in the first half of this year, with smokers switching to cheaper brands and quitting altogether. The firm also noted some weakness in Japan. We are encouraged, however, by British American's ability to raise prices in some mature markets, particularly Western Europe. Another bright spot was global volume growth of 5% by three of the firm's primary brands: Lucky Strike, Dunhill, and Pall Mall. Half of this growth was achieved by brand migration, however, and we expect volume growth to slow in the second half of the year.
We think British American is on the right track. Its balanced portfolio of discount, midprice, and premium brands should position the firm to weather the current economic storm and expand profitability in the long term. In recent months, British American has broadened its footprint in emerging markets through acquisition. While the company's first-half results show that this is likely to cause some short-term headaches as the recession continues to bite in emerging economies, we think this is a sensible long-term strategy that will allow the firm to achieve steady long-term growth.
