British American Tobacco Share Discussion Threads

[gabsterx] 20/7/2020 12:05

Sorry, wrong thread

[kiwi2007] 20/7/2020 11:30

It will be interesting to see Jefferies' reasoning behind such a whooping cut.
Perhaps Alphaville will reveal all later this morning?

[minerve 2] 20/7/2020 11:03

It's so easy to be a bear in a pandemic. I like analysts who are smart enough and bold enough to put their heads on the line with a bullish view. I posted such a view by a certain analyst on the Rolls-Royce thread the other day.

[philanderer] 20/7/2020 10:02

It shows that Jefferies had called it very wrong last time.

[muscletrade] 20/7/2020 08:00

Should also add that before anyone is too spooked by the Jefferies call that since the end of June 6 heavy hitters have reiterated their BUY ratings on BAT including GS, Deutsche, UBS, Morgan Stanley, Barclays and Credit Suisse, so Jefferies are going out on a bit of a limb here.

[muscletrade] 20/7/2020 07:53

interesting and different points of view on the same day. well it is only 11 days until BAT H1 update so we should soon see who's view is more accurate

[2vdm] 20/7/2020 07:53

Thanks muscletrade. Useful info.

[muscletrade] 20/7/2020 07:45

From Gen Alpha/seeking Alpha

British American Tobacco: Back In Deep Value Territory

Jul. 19, 2020 10:36 PM ET|12 comments | About: British American Tobacco p.l.c. (BTI), Includes: MO, PM
Gen Alpha
Gen Alpha
Long only, value, Growth, growth at reasonable price

(875 followers)
Summary
British American Tobacco operates a leading portfolio of both combustibles and next-generation products.

Its share price has dropped off since the FDA's authorization of MRTP designation for competitor Philip Morris' IQOS heated tobacco product.

In this article, I show why BAT's shares are highly undervalued.

Change is the name of the game in corporate America. It seems that every other day, there is a post on LinkedIn (MSFT) about the merits of an “adapt or die” culture. With good reason, many companies that were highly relevant decades ago no longer hold the same prestige that they once held. Take Xerox (XRX) or Eastman Kodak (KODK), for example. Both were industry stalwarts in their heyday, and Xerox was so popular that its namesake became a verb. For example, who hasn’t heard the expression: “Can you Xerox this for me?” The so-called economic phenomenon of “creative destruction” is a powerful one, as it compels companies to continuously adapt or otherwise fade into the sunset.

The tobacco industry has had the benefit of not having to change over many decades. However, in recent years, there has been a surge of innovation in the industry, with heated tobacco and vaping being prime examples. More recently, in what is seen as a victory for Philip Morris International (PM), the FDA, on July 7th, approved the marketing of the IQOS Tobacco Heating System as a modified risk tobacco product (MRTP). Specifically, this approval allows Philip Morris International and Altria (MO) to market IQOS with the following information, as noted on the FDA release:

AVAILABLE EVIDENCE TO DATE:

The IQOS system heats tobacco but does not burn it.
This significantly reduces the production of harmful and potentially harmful chemicals.
Scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces your body’s exposure to harmful or potentially harmful chemicals.
Turning attention to British American Tobacco (BTI), who is the primary competitor to Philip Morris and Altria, BAT’s shares have dropped off since the FDA’s announcement. As seen below, BAT has underperformed its two peers by around 12% over the past month. While some of the drop could be attributed to the ex-dividend on July 9th, I believe at least a part of the drop, if not the majority, can be attributed to the market’s perception of the FDA announcement on IQOS as a negative for BAT’s U.S. business.



(Source: Yahoo Finance)

While IQOS’ first-mover advantage and modified risk designation pose a risk to BAT’s combustible business, I see the share price reaction since July 7th as being unwarranted, as BAT has an attractive portfolio of next-generation products of its own.

A Diversified Tobacco Company

British American Tobacco became the largest global tobacco company by revenue, when it acquired the remaining stake in Reynolds American that it did not already own in 2017. It owns a broad portfolio of both traditional combustibles and next-generation products, such as its heated tobacco and vaping offerings. It also owns oral products such as moist snuff, snus, and the fast-growing category of tobacco-free nicotine pouches. As seen below, this market is expected to grow at a CAGR of 13% and reach a global TAM of $16.6 billion by 2024. One of the key drivers for this growth will come from increasing numbers of people who are trying to quit traditional smoking.



(Source: Business Wire/Technavio)

While IQOS’ MRTP status presents a key risk and could potentially chip market share away from BAT’s combustible products, the company does have a pending application with the FDA to sell its own heated tobacco Glo devices. The application was submitted in 2018, and while no one knows when and if a decision will be made to allow the Glo device to be sold in the U.S., I would expect a decision to come between later this year and the middle of next year.

This rough estimate is based on the two years that it took the IQOS application to be reviewed, with additional time given for COVID-19 related disruptions. In addition, I see the MRTP designation as a net positive for the heated tobacco sector as a whole, as it shapes consumer perceptions about the product. This is a net positive for when BAT’s Glo devices do get FDA approval, assuming they get the same MRTP designation.



(Source: Company website)

As the Glo application is pending with the FDA, BAT has positioned itself well with its tobacco-free nicotine pouch Velo product. Although this category is relatively new, it is seeing strong growth numbers, as evidenced by the 273% revenue growth that it saw last year. In addition, it also has its vapor offerings with Vuse and Vype products. It should be noted, however, that Vapor sales have declined in the U.S. since the outbreak of lung-related injuries and deaths that were reported in 2019. While the deaths have been linked to products containing THC and not nicotine, public perception (or perhaps misconceptions) on vaping took substantial damage.

However, decreases in vapor usage translate to a slower decline in the volume of combustibles. Per BAT’s first half 2020 update, the U.S. cigarette industry volume decline is expected to be just 4% this year, which is an improvement from the previously forecasted 5% decline. Also, let’s not forget that BAT is a global company with strong revenue growth in both new categories and combustibles. As seen in the full year 2019 metrics below, the company managed to grow new category revenue by 32% on a worldwide basis, and combustible revenue by 4.6%. This translated to an impressive 8.4% YoY EPS growth for the full year.



(Source: Spring 2020 Investor Presentation)

More recently, BAT’s first-half 2020 results look promising, as the Vuse brand grew market share to 26.2% in the U.S. vapor category. Its international vaping brand, Vype, continues to gain traction as it gained share in France and Germany, where it has a leadership position, and is the fastest-growing vaping brand in Canada. In addition, management reiterated its commitment to reducing leverage to below 3.0x by the end of 2021. As seen below, leverage has steadily dropped from 4.0x in 2018.



(Source: Company Investor Presentation)

Turning to a peer comparison, as seen below, BAT’s P/E ratio is 13% lower than that of Altria’s. The gap is even more pronounced in comparison to Philip Morris International, with BAT’s P/E ratio being 43% lower than that of PMI. Evidently, PMI is seen as the quality play in the tobacco space, with its leadership position in IQOS and a stronger balance sheet. However, I see the 43% discount on BAT’s shares as being rather excessive, especially given its robust portfolio of next-generation products and its commitment to deleveraging its balance sheet.



(Source: Created by author)

Investor Takeaway

British American Tobacco operates a leading portfolio of tobacco and tobacco-free products, and has demonstrated its ability to adapt to changing consumer tastes and behaviors. In addition, I’m encouraged to see management’s commitment and progress towards deleveraging its balance sheet, which has been an overhang and risk factor for the company since acquiring the remaining stake in Reynolds American in 2017. I see BAT’s share price drop since the FDA’s July 7th announcement of IQOS’ MRTP designation to be unwarranted. This announcement is a net positive for BAT’s heated tobacco product that is currently under FDA review, assuming that it gets the same designation after approval.

I have a Buy rating on shares at the current price of $35.44 and a P/E ratio of 8.5. I also view the 7.5% dividend yield to be safe and attractive, as management has guided for a ~65% dividend to adjusted earnings payout ratio. This allows management to use the remaining funds for continued deleveraging and reinvestment into the business. I have a $50 price target on shares, which would bring the P/E ratio to a reasonable 12.0 and represents significant upside from today’s levels.

[buywell3] 20/7/2020 07:38

2400p retest anyone ??

[p0pper] 20/7/2020 07:35

Jefferies International Hold 2,785.00 2,785.00 4,800.00 3,000.00 Downgrades

That is some downgrade

[grahamburn] 17/7/2020 14:51

corbeta. Just a heads up, BAT has a relatively small footprint (turnover) in UK market.

[gary1966] 17/7/2020 13:40

Been watching these for a while and took the plunge today as the RSI is bombed out, gaps to be filled and happy to have a nice well run defensive share in the portfolio after the markets have had a little run up and possible start of some rotation out of tech stocks.

GLA

[corbeta] 16/7/2020 18:28

I'm not panicking but the share price decline could be due to
more UK smokers quitting:-

[18bells] 16/7/2020 13:15

BATS has been holding up quite well in comparison to other stocks in other sectors. The other sectors are starting to be more favourable so investors are not so attractive to BATS. Im no panicking. It will rock up when other sectors start to publish their poor performance during lockdown.

[jahardie] 16/7/2020 11:34

....... and Philip Morris is up by 8% this week and flat for the month (compared to BATS 12.5% fall), therefore possibly it's the Philip Morris FDA/IQOS issue that's hurting BATS at the moment.

[jahardie] 16/7/2020 11:26

Share price down 12.5% from this months highs, that's quite a big fall. I'm trying to understand why, possibly it is due to the results being released 31 July, maybe it was the FDA granting Philip Morris IQOS rights and not BATS. Is there some other bad news out there?Possibly its just tobacco stocks in general, Imperial is down 8% this week, which is fairly similar to BATS.

[philanderer] 09/7/2020 13:44

"US FDA authorizes marketing of IQOS as a Modified Risk Tobacco Product"


The U.S. Food and Drug Administration (FDA) yesterday authorized the marketing of IQOS, Philip Morris International’s (PMI) electrically heated tobacco system, as a modified risk tobacco product (MRTP).

In doing so, the US FDA found that an IQOS exposure modification order is appropriate to promote the public health.

The decision demonstrates that IQOS is a fundamentally different tobacco product and a better choice for adults who would otherwise continue smoking.

IQOS is the first and only electronic nicotine product to be granted marketing orders through the FDA’s MRTP process.

[18bells] 09/7/2020 13:33

Bats seems to go the opposite to the general market. It will be back up soon.

[philanderer] 09/7/2020 10:09

9th july UBS buy tp 3800p up from 3200p

[saltaire111] 09/7/2020 09:34

Ex-d today, as confirmed by popper above.

[18bells] 09/7/2020 08:19

Close to divi day?

[p0pper] 09/7/2020 08:19

ex divi today kiwi