Tobacco Maker BAT Is Hardly Flaming Out. New Products Will Help Boost the Stock.
Cigarette maker British American Tobacco has been under pressure as effective public health campaigns led to restrictions on smoking in public places, and changed the way its products are marketed.
The stock (ticker: BATS.UK) has fallen 26% in the past three years to 25.36 pounds sterling ($34.60), along with peers Japan Tobacco (2914.Japan), down 27.39%, and Altria Group (MO), which lost 28.12%.
The Food and Drug Administration in April announced a ban in the U.S. on flavored cigars and menthol cigarettes—the latter of which generates 25% of BAT group profits, according to estimates from broker Jefferies. Uncertainty surrounding the implementation of the ban has also been a drag on the stock.
But the maker of Lucky Strike and Newport in 2020 invested £430 million in new products that included e-cigarette Vuse, glo tobacco-heated products, and Velo nicotine pouches. While noncombustible products—those that don’t involve burning tobacco—account for just 12% of overall revenue, new Chief Executive Officer Jack Bowles says BAT’s new products are set to soar this year.
In June, the company raised annual growth forecasts to more than 5%, from 3% to 5% previously. More than 2.6 million new users of what BAT calls “lower-risk products” were added over the first half, amounting to 16.1 million. BAT estimates it will boost that number of users in this category to 50 million by 2030 and hit £5 billion in sales for this part of the business by 2025.
Laura Parisot, an analyst at independent research firm Alpha Value, forecasts the stock could rise 75% to £44.34. She said in a recent note that the new categories business has “impressively grown” 37% in 2019. “There is no doubt that growth will continue in this segment,” she wrote.
Jonathan Leinster, an analyst at Société Générale, has a Buy rating and a more modest £36 price target. The resumption of the share-repurchase program in 2022 and growth in the sales of the new products “will be a positive catalyst for the shares.”
BAT sells more than 200 brands in over 180 markets. It has a market value of £58 billion and employs more than 55,000 workers. The stock has a low multiple of 7.3 times this year’s expected earnings and is valued in line with its peers.
BAT posted pretax profit of £8.6 billion for 2020 on revenue of £25.8 billion. That compares with £7.9 billion in pretax profit in 2019 on sales of £25.8 billion.
“There is great momentum across the business,” Bowles tells Barron’s, adding that the company is on track to meet its targets of £5 billion in new category revenue by 2025 and 50 million noncombustible product consumers by 2030. “We are building strong, global brands of the future with Vuse, Velo and glo,’’ he says.
Traditional stick cigarettes, though, are still a significant part of the business. There are 1.1 billion combustible customers, despite sales volumes gradually falling over the years.
Developing countries contribute to around 70% of the company’s cigarette volume and could be a spark for growth. BAT has Pakistan, Bangladesh, and Vietnam in its sights, each of which have more relaxed approaches to smoking regulations.
A further boost for the business is its cost-cutting program called Quantum. Alpha Value’s Parisot says it should deliver £1 billion to £1.5 billion of efficiencies over the three years through 2022. BAT has a solid dividend policy, with a hefty 8.8% yield and 23 years of dividend growth.
Those payouts should keep investors happy as the cigarette market changes.