UPDATE: 0️⃣ BASIS POINTS! BUT FURTHER INTEREST RATE HIKE NOT RULED OUT. UNANIMOUS DECISION, NO WORD ON INTEREST RATE CUT 🤔💸
British American Tobacco $BTI
$BATS BAT after -20% share price crash: what is management doing?📉
Hello friends of the blue smoke!🚬
As you requested, today I'm going to talk about British American Tobacco - a company that also appears very often in my Getquin as well as Youtube posts. I know what you're thinking now: why should I read through this when I already know your video?
Good point. Just like it and I'll see you next time...all kidding aside.
Today, in addition, for all my non-subscribers on YT, I'll recap the info and then aim for a brief comparison with Philip Morris (PM) to show the different ways two corporations in the same industry can go. The focus will also be on a Youtube comment that I want to use as a hook for this post. So if you also want to get indirect popularity (anonymously of course), feel free to subscribe to me on Getquin and Youtube!
First, as always, my disclaimer: This is not investment advice. It is also not an invitation to buy/sell financial products. I only describe my opinion here and you have your own responsibility towards your investments. So I also assume no liability.
We start with the following questions:
1. BAT in price fire: Why is BAT being punished? How does this affect BAT's stock valuation?
2. how is Philip Morris (PM) trading?
1. BAT in price fire - what happened and what will become of BAT's share valuation?
Many of my subscribers will have seen that my current BAT video has met with a very great response and continues to generate decent traffic including likes. However, the opinions are not always positive, because often I get dislikes for criticizing the favorite stocks of some users despite hours of research and video editing. This is also everyday life and enriches. This would normally not be worth mentioning to me.
BUT:
A user, whose comment is meanwhile no longer displayed, wrote meaningfully:
"I am glad that BAT does not act as you imagine or wish. BAT is a tobacco company and sells cigarettes and that's that.." Zack Dislike.
This stance is essentially based on the notion that BAT should leave the focus on cigarettes in the future and highlights a lack of importance of the trend towards less tobacco products and more tobacco heaters. I imagine I see a fear here that is driving many investors around right now:
"If BAT makes a shift toward more tobacco heaters and possibly cannabis products in the future - what will be left of the cigarette cash cow?"
BAT itself is already clearly in the midst of this upheaval, and not without reason has clear wording à la "Change," "A better tomorrow," and, by implication, protection against smoking-induced risks in almost every one of its annual reports.
Unfortunately, this "better tomorrow" has recently been overshadowed by illegal sales of tobacco products to North Korea, which in turn have fallen under US criminal law for corporations. As a consequence, BAT was kindly allowed to pay 629 million USD to the government authorities and also resulted in a change of leadership within the highest level (see (1), (2)).
So instead of Jack Bowles as CEO of BAT, we now welcome Tadeau Marroco in his new role. He is no stranger to this - in fact, he has been with the company since 1992, almost 31 years, and knows the challenges and goals of the Group. I write this not without reason, because his two specifically defined goals seem at first glance to contradict each other:
1) To compensate for increasing smoking bans and
2) To promote the trend toward smoke-free alternatives.
For one thing, these goals are very broad - how to compensate? How to solve the problem of cross-funding both goals with each other? What is the reinforcement of the trend?
So did that go down well when he stood before the audience with it after taking over on 15.5.2023 and called up these points?
So semi - if you look at the insider transactions that have to be disclosed regularly according to US law, we currently see 30.1 million shares in insider hands. In addition, 665 institutional investors currently own shares in BAT, which, together with the insiders, amounts to about 8.2% of non-private investors. These investors include well-known names such as Goldman Sachs, the American Mutual Fund, as well as Blackrock and Invesco. In the last 3 months, more of these professional investors have divested from BAT than have bought new shares. The result is (see (4), (5)):
86,346 shares sold in the last 3 months.
Vs.
1,648 shares bought last.
In longer-term periods of 3 months and more, we quickly see that more shares have been bought here on average. Thus, we can speak of a short-term flight of institutional investors from this financial product (cf. (5)).
Does this necessarily have to be bad?
Not necessarily, because this type of investor does not necessarily have a long investment focus, but occasionally also engages in medium-term trading. The focus here is quite different from time to time and is similarly volatile as some stock recommendations, because the shareholder does not currently recommend buying the BAT share either (see (6)).
Can we already cut short here and put BAT on file?
I don't think so, as we received a brief trading update on 06/06/2013 on what BTI plans to do going forward and how the second quarter has started so far. We learn that constant currency revenue growth is expected to be 3% - 5% in subsequent quarters and that mid-single digit growth is planned to be finalized for EPS. It is particularly highlighted that EPS (i.e. earnings per share) grew by 4% in the first half, but that seems to reduce the full year performance to -1% considering the FX impact in the second half. I would like to translate Tadeau Marroco himself directly at this point:
"We are also making good progress in reducing our balance sheet positions and will pass on excess liquidity (meaning monetary working capital away from capex or operating expense planning, note from me) to shareholders." - Tadeau Marroco (translated)
Why am I quoting this?
The statement is close to the existing dividend focus and comments very positively on the previous dividend policy. The focus is on reducing cash holdings or redistributing them to shareholders. This is of course gold in the ears of shareholders and a very positive advertisement of the share price so far. The analyst house Jefferies was less impressed by this and left the price target at 4,100 pence (or 41 pounds sterling😊). Based on the current price, that would be about 36.7% upside potential. So much for the highly promoted content on the part of Tadeau Marroco and the brief summary of his points raised.
But wait - there's more!
If you read the trade report crosswise, you can see the coverage of these statements with the forced targets from page 2 upwards. One does NOT want a shift away from the "A Better Tomorrow" campaign that began in 2019. One wants to stick with the mantra that current smokers will switch 1:1 to replacement products and just as one does not want to extend the diversification idea any further.
Means in German mMn: The present product categories VUSE, GLO and VELO are to remain further exclusive product categories and it is not to be established definitely still another mark. Original statements such as (see (7)):
- "We have winning brands. We have a strong pipeline ahead of us"
- "The strategy is right"
Almost seems like a swearing-in to the existing "A Better Tomorrow" strategy.
Strictly speaking, nothing at all is actually happening now, but this nothing at all must be established positively, because the figures from Q1 actually showed a gain in non-combustion products of 900,000 new customers. This is exciting, because here is argued with absolute numbers that seem huge for consumers. In fact, you just have to compare the original statements: apparently BAT has "reached" the 23 million consumers of non-combustion products - there is an increase of almost one million approx:
0.9 million / (23 million - 0.9 million) = 4.07% growth rate.
That doesn't sound very spectacular at first. The target agreement is more exciting: the company wants to achieve profitability in 2024 with the replacement products. At present, these are still loss-making and cost BAT more money than they bring in. Given BAT's internal structure, this is a difficult situation, because the cash conversion rate is supposed to be over 90% at the same time.
The...what?
The Cash Conversion Rate describes how much money I free with my main business. In other words, what I can convert from net income into free cash flow. It is considered an important measure of the financial health of a group and is easily calculated via (8):
CCR = cash flow / net income
A simple fraction with high informative value about the effectiveness of the capital employed, its turnover and what growth is necessary to become profitable.
BAT itself is unsurprisingly dependent on the cigarette business and would achieve a negative result if viewed individually via substitute products. Therefore, no added value could be created on the basis of the CCR and that would also be the end of the dividend. However, as the company aims to achieve sales of £5 billion with non-combustion products in 2025 and is profitable, the value here would be over 0 and would therefore be suitable for a dividend payout.
But how much market volume is really there?
A look at VUSE shows us: The brand is slowly taking off. We are at 2.8% share growth in the replacement product market and thus at 38.8% total share. It makes you one of the biggest players in this market and is now available in over 40 markets. Colombia and Peru in particular stood out positively in their start-up phase, so we can talk about a reasonably stable and growing replacement product market here.
In GLO, however, we are seeing the first impediments to growth. Specifically, the GLO share in target markets has fallen by 1.1%, so that we now have a share of 18.2% in target markets. Italy and Japan may be a future proxy here, as both markets are currently highly competitive and BAT's GLO brand is struggling here. As a result, the positive growth of the other countries could not be maintained and we observe a setback for BAT here.
In VELO, we see a replacement product that is active in 15 EU countries and whose share in the Modern Oral category has unfortunately also fallen by 1.8%. This leaves only 28.5% share, with high hopes in Pakistan and Kenya.
So much in short words about the respective substitute products. Let's take a brief look at the key KPIs:
The P/E ratio is currently 8.7 times earnings per share. So we are pricing in about 8-9 times the annual payout per share. Compared to Japan Tobacco, Altria Group as well as Philip Morris, this is a relatively cheap value, with the top 5 tobacco companies including BAT priced at 18 times. This means that BAT is currently cheaper than its competitors (see (7), (8)).
But is this also justified?
A look at the chart reveals a decline of 21.41% in the share price over the last 6 months and is attributable to the following factors (see (8), (9)):
- BAT's North Korea sales
- The relatively sudden replacement of management
- Lack of new or rescue impulses from the crisis
- Declining importance as an inflation hedge
If we look in parallel at the growth forecast from the analysts, we get on average, depending on the source:
Growth (profit): 3-4,5%
Growth company: 7.7%
The S&P 500 currently stands at annual returns of 8%-10% depending on the entry point, so I personally see BTI (without performing a complex calculation here) as a defensive stock despite the announcements. In my opinion, it is more about maintaining the existing dividend culture and less about outperforming the broad market in the long term.
This is also in line with the 200-day average of 36.75 USD, which is currently massively undercut by the price of 32.31 USD. Due to the higher discounting of future profits via the key interest rate plus the first growth setbacks in future products, we quickly recognize that this sector in particular must deliver. The future enterprise value (EV), i.e. the calculated value of the company based on future cash flows, has fallen to 97.24 billion pounds sterling compared with EBITDA. Together with EBITDA, this results in a parameter of 7.7, which shows a significant decline in previous company valuations. This has also led to a significant drop in market capitalization and, at first glance, interesting dividend yields of up to 8.2% at a historically low P/E ratio (see (9), (10)).
All in all, BAT is currently caught in the crossfire between management changes, image rebuilding, the declining growth rates of replacement products, etc. in the important emerging markets and must now reposition itself in the market. I am curious to see what innovations will be announced in future meetings. If you ever want to see a detailed stock analysis, feel free to write it to me in the comments.
2. what does Philip Morris do?
I'll drop the bombshell right at the beginning: Today, June 14, 2023, Philip Morris made a very clear statement via management about the future of the Marlboro cigarette:
There is none.
Yes, that's right - Philip Morris is now planning in much more concrete terms to end the mainstay of sales, the classic cigarette, and is now taking a much more precise approach to a burner-free product policy than expected. Only tobacco heaters and electronic cigarettes are to find place in the assortment of PM. One refers here clearly to the 95% less pollutant load by heating and would like however further nicotine products to drive out. At least one way is going in a healthier direction.
PM's argumentation is relatively close to my own: The cigarette market cannot be sustained in the industrialized countries in the long term and needs disruption via substitute products. Every year, 3% fewer cigarettes are already sold per year, which is a benchmark for total sales. So you want to push this cash cow to the end before you lose out to competitors like VUSE, GLO and VELO.
This is exciting as it is a far more radical approach and I personally am now still waiting from meeting to meeting for the announcement of the completely cigarette-free future. I found the call for a ban on single-use e-cigarettes particularly positive, although I am normatively critical of bans. It remains to be seen how governments will react to this demand.
Can this change work to such a radical extent?
If we could say that with certainty, all of our lives would be much easier. Philip Morris itself reports a 35% sales share of non-combustion products and emphasizes that it does not want to create a product image that is too strongly geared to children and young adults. In particular, the in-house IQOS brand is performing well, achieving relatively good sales in terms of new customer growth and their sales figures.
Specifically, net sales increased by 3.2% in Q1, resulting in plus 4.4% sales growth per product. Constant currency EPS was also +4.4%, reaching $1.38. In particular, the following fact is emphasized (see (11)):
IQOS increased its sales by +14% (cf. (11)).
BUT: This does not include currency adjustments.
So where did we end up in this "short" (about 2,500 words) update?
We have realized that the current annual reports and the successes & challenges stated therein have not punished BAT for nothing. You don't get anything for free on the stock market and that is a fact. BAT must answer the following questions:
- How can VUSE & Co. Regain market share from low-cost suppliers with disposable products?
- Is brand focus the right way or do we need more openness here?
- Is the market for substitute products really as big as the tobacco market?
- How long will the cigarette boom in the emerging markets last and how do you reduce the currency risk?
For Philip Morris, my thoughts are as follows:
- At what point do you drop the glow stick?
- Will the position as an inflation hedge be threatened by the substitute products?
- How will PM support Altria after the JUUL disaster?
I hope you enjoyed my brief update on what I consider to be the most interesting points. If you feel like more tobacco now, feel free to check out my mentioned BAT video - every subscriber helps!
Thanks
Your Bass-T
#dividend #dividenden
#dividendencheck
#bat
#bti
#tabak
Sources
(1) https://www.sueddeutsche.de/wirtschaft/nordkorea-zigaretten-1.5827632
(3) https://finance.yahoo.com/quote/BTI/insider-transactions/
(4) https://finance.yahoo.com/quote/BTI/holders?p=BTI
(8) https://en.ryte.com/wiki/Cash_Conversion_Rate
(9) https://finance.yahoo.com/quote/BTI/
(10) https://ch.marketscreener.com/kurs/aktie/BRITISH-AMERICAN-TOBACCO-54264463/
