British American Tobacco – BAT
British American Tobacco sells tobacco products worldwide. It holds leadership positions in more than 50 markets, and is the third-largest global cigarette manufacturer behind China National Tobacco and Philip Morris International. BAT’s brands include Dunhill, Kent, Pall Mall, and Lucky Strike. The company’s products cover the full range from low-price to premium products. In more recent years, the firm has started producing and marketing smokeless tobacco products. British American owns 42% of Reynolds American and 31% of ITC Limited, the leading Indian cigarette maker.
About 75% of the company’s sales occur in EMA, and with the rising middle class in these regions there is the potential to leverage its business into a significant growth opportunity in the coming years. Furthermore, with healthy operating margins and a well-balanced portfolio of brands, BAT has been able to maintain a meaningful dividend policy. In past years, the dividend payout has been maintained at about 60%, and it’s expected that this ratio will be remain at this level until further notice. Additionally, the company has entered into a share buy-back program for an amount of about GBP 1.5 billion.
BAT’s business is well ring-fenced with a broad-based distribution network which in addition to the publicity restrictions makes it difficult for new providers to grab the company’s market share. It is therefore feasible that the company will grow constantly at around 4% per annum and BAT will be able to generate a ROIC rate of 20% for the years ahead. Furthermore, given BAT’s very effective management structure it can be expected that EPS growth will be in the high single-digit range for the years to come.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Brand recognition is extremely strong,
- Revenue streams are well diversified,
- The company is rapidly expanding into EMA,
- BAT benefits from the increasing middle class in EMA, and should be well positioned to take advantage of new consumer preferences such as smokeless cigarettes,
- BAT is well positioned in the US and Indian markets with a stake of 42% in Reynolds American and 31% in ITC Limited.
Weaknesses:
- Higher excise taxes will temporarily reduce sales growth,
- With ongoing economic concerns, consumers could replace higher-value products with lower-priced ones, hence BAT’s top price segment might suffer more than the competition’s,
- Further regulatory restrictions such as no-name packaging, could reduce the company’s sales volume dramatically,
- The company’s shares are quoted in GBP while the majority of business occurs in USD and Euro denominated regions. A stronger GBP would therefore be negative for the company’s balance sheets,
- Finally, the financing of share buyback programs could be postponed.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Below average |
| Expected growth: | Above average |
| Long term value creation: | Excellent |
| Positive competitive advantage: | Average |
| Management excellence: | Average |
| Financial strength: | Average |
| Investment orientation: | Group “Best-in-Class”:
Emerging Markets Exposure, Value |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |