Will British American Tobacco Continue to Rise?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The income statement for the first half of 2012 of British American Tobacco (NYSEMKT: BTI) , the second largest tobacco company worldwide, showed a modest growth in earnings: they have risen by less than two percent from £2.7 billion (roughly $4.3 billion) to £2.8 billion (roughly $4.4 billion). Despite this growth in earnings and despite the immediate market reaction to this news – the BTI stock increased by 7.6% within the first few days after the publication – there are some reasons for concerns in regards to this company’s progress. Let’s examine the company’s financial results, point out some of the company's struggles and compare its performance to other tobacco companies.
Despite the growth in the company’s earnings, its revenues remained nearly unchanged. On a regional comparison there was a decline in operational profits in Americas and West Europe; mainly due to currency changes. But even when controlling for the currency changes, the operational profits didn’t increase by much. In terms of volume of cigarette sales there was a decline in Western Europe but a slight rise of 1% in the Americas – the largest region in terms of profits – mainly due to an increase in sales in Canada and Chile.
In many countries in the Asia-Pacific region – the second largest region in terms of profits – including Japan and Australia there was a decline in volume sales. The rise in prices and currency fluctuations has offset the decline in volume. There was also a rise in competition in several counties such as Australia that could pose a risk to its future growth.
Finally in the Eastern Europe, Middle East and Africa there was a rise in both volume and prices.
This shows the company’s operations have dwindled in Asia-Pacific and West Europe, while there was a slight gain in EEMEA and Americas regions. This mixed trend could continue in the months to follow and thus impede the progress the company’s stock and operational profits.
On the other hand, currency fluctuations were one of the factors that impeded the rise in earnings – according to company estimates nearly £90 million (roughly $140 million) were due to currency shifts.
The operation profit margin of BTI is very high and for the first half of 2012 reached nearly 37%. As a comparison, during the first half of 2012, Altria Group Inc. (NYSE: MO) profitability was 29% and PM’s profitability was 23%.
There are also positive reports about the management team of BTI that also makes an investment in this company a little more compelling.
During 2012, the stock of British American Tobacco has outperformed the S&P500 index. The chart below shows the developments of Philip Morris (NYSE: PM), British American Tobacco and S&P500 index normalized to the beginning of 2012. The chart shows how BTI’s outpaced the S&P500; mainly during recent months. On the other hand, Philip Morris has outperformed BTI during the year.
But this isn’t all, if you consider the fact that major tobacco companies offer a high dividend yield, this lowers the attractiveness of BTI compared to its peers: during 2012 the dividend yield of PMI offers nearly 3.4% dividend yield, Reynolds American Inc. (NYSE: RAI) offers 5.2% yield, Altria Group Inc. (NYSE: MO) offers 4.7% yield, and BTI offers only 2.4% yield.
The Foolish bottom line:
There is no clear cut answer what is next for BTI in the near future. The company continues to grow and expand its operations – mainly in the Americas and EEMEA – despite the global economic slowdown and the fluctuations in currencies that will continue to pose a risk on the company’s revenues and, in turn, its profits. The company has several additional strong points: the company presents high profitability compare to other tobacco companies. The stock has outperformed S&P500 during the year. The company offers a reasonable dividend. But there are some concerns that could impede BTI’s growth including the slowdown in Asia-Pacific and Western Europe and currencies risks.
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