This week Colin Manktelow of NW Brown Wealth Management looks at British American Tobacco following its recent trading update.
Stocks in Focus: British American Tobacco
The update was positive with deleveraging progressing in-line with previous guidance and increased market share in both traditional cigarettes and ‘New Category’ products.
Revenue growth for the year is expected to be in the upper half of a 3% to 5% range, and the US, which contributes over 40% of group revenue, continues to perform well supported by fewer discounts this year. Despite market share gains in the ‘New Category’ products, management have lowered growth forecasts in this category to the bottom of their 30% - 50% range. This reflects the recent slowdown in the US vaping market, due to increased health concerns. There have been more than 2,000 cases of lung disease and 42 deaths reportedly related to vaping. Chief Executive, Jack Bowles, reassured investors that the concerns should lead to a ‘better and stronger regulatory environment’ and insisted that BAT would be well placed to succeed if this is the case.
Positive news came for the company last month when US regulators shelved plans to force tobacco firms to reduce the amount of nicotine in cigarettes, following a proposal by the US Department of Health and Human Services in 2017. Investors had feared that, if successful, the proposal would have impacted BAT’s tobacco sales dramatically.
Management continue to believe that while combustible tobacco products will remain at the core of the business for some time, the ‘new category’ products should provide long term sustainability for the company despite the ongoing regulatory scrutiny.
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