The stock of British American Tobacco PLC (NYSE:BTI, 30-year Financials) appears to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $37.91 per share and the market cap of $87 billion, British American Tobacco PLC stock is estimated to be modestly undervalued. GF Value for British American Tobacco PLC is shown in the chart below.
Because British American Tobacco PLC is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 5.6% over the past three years and is estimated to grow 1.37% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. British American Tobacco PLC has a cash-to-debt ratio of 0.05, which which ranks worse than 87% of the companies in Tobacco Products industry. The overall financial strength of British American Tobacco PLC is 4 out of 10, which indicates that the financial strength of British American Tobacco PLC is poor. This is the debt and cash of British American Tobacco PLC over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. British American Tobacco PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $33.5 billion and earnings of $3.609 a share. Its operating margin is 39.48%, which ranks better than 85% of the companies in Tobacco Products industry. Overall, the profitability of British American Tobacco PLC is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of British American Tobacco PLC over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of British American Tobacco PLC is 5.6%, which ranks better than 66% of the companies in Tobacco Products industry. The 3-year average EBITDA growth rate is -30.4%, which ranks worse than 85% of the companies in Tobacco Products industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, British American Tobacco PLC's ROIC was 5.65, while its WACC came in at 5.42. The historical ROIC vs WACC comparison of British American Tobacco PLC is shown below:
In summary, the stock of British American Tobacco PLC (NYSE:BTI, 30-year Financials) gives every indication of being modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks worse than 85% of the companies in Tobacco Products industry. To learn more about British American Tobacco PLC stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
