BUY OR SELL-Will investors stay addicted to Swedish Match?

STOCKHOLM, Dec 1 (Reuters) - Conventional wisdom holds that in times of economic woe so-called sin stocks, such as tobacco products maker Swedish Match (SWMA.ST), offer relative safety.

The theory is that companies that cater to people's vices are less subject to cyclical economic forces. So far this year the Swedish firm has borne this out by strongly outperforming its local market.

Will the firm's enviable position in the profitable wet snuff business continue to see it through, or will a declining market for premium cigars give investors cause for concern?

UNFAIR PREMIUM

JP Morgan's Erik Bloomquist said the firm is well-managed and the trends in its core businesses are positive, but he believes a premium of almost 20 percent to international peers is too high.

Bloomquist has an underweight rating on the share.

"We don't think the earnings growth is going to be that much different, so we don't necessarily see the reason why it should trade at a premium," the analyst said.

Bloomquist would recommend buying the stock if it were cheaper. "But right now, we think there is more upside in the other names relative to Swedish Match."

Swedish Match premium cigar sales in the United States have slid the past three quarters and raised questions over how much the slump in consumer spending will hurt the firm.

"That's one of the areas, operationally, where there is a little bit of concern," Bloomquist said, adding the retailer's ongoing move to sell cheaper cigars may dilute margins.

Swedish Match is often touted as a takeover candidate, but he thinks any merger is unlikely in the next 12 to 18 months.

"Given the current debt situation and the high cost of raising any debt, we think there isn't any real urgency to doing a deal. And we think that companies that are interested are either going to be busy de-leveraging or waiting for more advantageous debt markets."

STICK TO IT

Cheuvreux analyst Martin Sikorski likes the stock's defensive qualities, which have allowed it to perform significantly better than the broader market this year.

"In a market where investors will be oscillating between hope and despair, Swedish Match is a relatively safe place to put your money," he said. He rates the stock "outperform".

The share has dropped 22 percent this year, but that compares with a 45 percent fall in the broader Swedish market.

"This is a company whose earnings potential is not really impacted by the business cycle to any large extent and therefore I think earnings growth in 2009 will continue without any major nasty surprises," the analyst said.

Swedish Match sells most of its snuff in Scandinavia, but U.S. growth potential is promising, according to Sikorski.

The cigar business could be affected by the downturn and it represents some 25 percent of EBIT. But the rest is generated in businesses that should be resilient, he said.

Sikorski noted there is also a chance, albeit remote, that some day Swedish Match will be able to sell to a bigger European market. Wet snuff, a tobacco product sold loose or in pouches, is allowed in Scandinavia but banned elsewhere in the EU.

Sweden's trade minister said last week the ban goes against the principle of free trade.

"This is the first time a Swedish government has actively given its support to the snuff industry," Sikorski said, though he downplayed the prospect for a near-term lifting of the ban. (By Veronica Ek; Editing by Hans Peters)