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BAT downgraded by Citi after disappointing sales and progress on cigarette alternatives

Citi downgraded the stock to ‘neutral’, saying it now prefers US-listed Philip Morris

BAT
BAT has been expanding its alternative cigarette products

British American Tobacco (LON:BATS; NYSE:BTI) has been removed from Citigroup’s Focus List Europe after reporting weaker-than-expected 2017 sales growth and progress on its next-generation products (NGPs).

Citi downgraded the stock to ‘neutral’, saying it now prefers US-listed Philip Morris International Inc (NYSE:PM).

READ: BAT sales boosted by Reynolds acquisition, but organic volumes decline

“Citi’s Tobacco analyst, Adam Spielman, argues that the link between sales growth and margins has been broken in the new world of Tobacco and that companies will have to deliver on both to merit higher price to earnings ratios,” the broker said.

“Accordingly, he does not expect a BAT rerate until they can turn the strong sales growth from Glo into margin expansion, which he does not expect in the next 12 months as it invests heavily in Glo and other NGPs.”

In its full year results, BAT said the contribution from its Glo tobacco heating product was only minor last year because it was only present in a few markets and was grappling with capacity constraints. It plans to bring Glo to 14 additional markets this year.

The group has been expanding its product offering to include e-cigarettes and products that heat tobacco without burning it as the cigarette market slows.

However, it has been falling behind rival Philip Morris on tobacco-heating devices that some consider more appealing.

The company, whose brands include Dunhill and Lucky Strike cigarettes, reported a 37.6% increase in full year revenue to £20.29bn but this was below the £20.55bn expected by analysts.

NGPs contributed £500mln of revenue last year, missing forecasts of £550mln. The group is targeting £1bn of revenue from NGPs this year and aims to reach £5bn by 2022. 

Quick facts: British American Tobacco PLC

Price: 2567.5 GBX

LSE:BATS
Market: LSE
Market Cap: £58.88 billion
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