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Jonathan Poland
Jonathan Poland
Articles (456)  | Author's Website |

British American Tobacco Is Still a Buy

Share prices have fallen to 2010 levels, while the company continues to grow

January 15, 2019 | About:

British American Tobacco (NYSE:BTI) has seen its stock fall by more than 50% in the last 52 weeks, all while its financial performance has never been better. More importantly, the underlying business will survive any short-term market volatility. And, with the stock trading in the low-$30 range, it is a bargain issue paying out more than 8% in annual dividends.

Less than two years ago, in the summer of 2017, British American Tobacco acquired Reynolds American, further consolidating the cigarette industry. And, while the market punished shareholders in 2018, the future still looks green for the maker of Lucky Strike, Pall Mall, Newport and Camel.

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I’m not a smoker, and smoking doesn’t seem to be a big thing here in Washington, D.C. But, the business model is profitable and likely will remain that way even with the heavy burden government taxes have placed on the industry in the U.S. and U.K., where there are an estimated 50 million smokers. This is a small portion of the more than 1 billion estimated smokers worldwide, yet the business model remains highly profitable

The future for these two heavily regulated countries still holds a place for tobacco and nicotine products, even if the pivot may be happening with e-cigarettes and heated tobacco. British Tobacco already has Vype, Vue and Glo, which will give Altria’s Juul a run for its money if this segment continues on trend.

In fact, this shift could prove more profitable long-term with the Chinese market a big target for the new phenomenon. Across the U.K. and U.S., sales of vaping and e-cigarette products have exceeded $5 billion annually. China has just 1 million vapers, compared to 350 million smokers. Creating space in the minds of Chinese smokers switching from smokes to vapes would be a major win for British American.

Aside from China, the rest of the world still smokes a lot of cigarettes. British American also holds 31% of ITC Limited, the leading Indian cigarette maker. But, even with its massive population, Indian citizens are at the bottom of the list of cigarette consumption, just after Switzerland. Going into 2019, the company’s management expects to gain market share even as volumes decrease.

In addition, with the Brexit vote coming today and the exit from the EU set to happen in a couple of months, who knows what will happen to the pound sterling (GBP). Long term, countries tend to stabilize and peacefully work out currency fluctuations. In either event, people will continue to purchase cigarettes in whatever form they are available.

In the last 12 months, the company generated 24 billion British pounds in sales, and is expected to earn north of $3 per share in 2019. For a stock that historically trades above 16x earnings, the current price provides a fairly high margin of safety along with short-term upside potential around 50%.

Disclosure: I am not long/short any stock mentioned.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website


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