BAT is engaged in the manufacture, marketing and sale of cigarettes and other tobacco products. The company has a robust market position, driven by the strength of its GDBs portfolio, which enables it to capture more market share as shifts in consumer preferences occur. However, growing regulation and excise tax on tobacco products is causing prices of products to increase, which is giving rise to illicit trade. This could deprive BAT of potential customers, while also affecting its long term revenue growth.
In our opinion, British American economic moat comes from its impressive brand portfolio that is quite evenly balanced across price points. British American’s premium offerings, which comprise around one third of its portfolio volumes, include Dunhill, Kent, Lucky Strike, and Rothmans.
British American Tobacco remains committed to maintaining its 42% stake in Reynolds American and plans to invest $4.7 billion. The move should enhance BTI's position in one of the world's most profitable tobacco markets. Business prospects at British American remain solid. The company is still seeing lower overall demand for its cigarettes, but it continues to report solid gains from its Dunhill, Kent, Lucky Strike and Pall Mall brands. BTI offers a good dividend yield. Over the 3- to 5-year pull, the equity offers about-average total return potential.
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Strong market position driven by GDBs
Strong global footprint reduces business risk
Product innovation drives organic growth
Pending legal cases could tarnish brand image
Lack of scale compared to peers
Growing illicit trade
Stringent advertising regulations on promotion and packaging of tobacco products
Increasing excise taxes could pressurize profitability
Growing market for tobacco products in the Asia-Pacific
Growing snus market
Increasing demand for e-cigarettes
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The information presented in this report has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guranteed. All material is subject to change without notice. The views and opinions expressed are those of Focused Stock Research and/or WALT ST Investment Management, Ltd. and in no way reflect the views and opinions of Investment Consultants nor their Broker Dealers.