Key Morningstar Metrics for British American Tobacco
- : £47Fair Value Estimate
- : ★★★★Morningstar Rating
- : WideMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
British American Tobacco BATS presented an updated strategy at its capital markets day, but most of it was unchanged. BAT expects to drive growth from new categories while extracting robust free cash flow generation from its combustibles business.
Why it matters: Shares declined 2% on Sept. 29 as the market may have expected upgraded guidance. Instead, the company maintained its midterm annual average growth targets of 3%-5% for revenue, 4%-6% for adjusted operating profit, and 5%-8% for adjusted diluted EPS.
- For 2026, BAT continues to expect to hit the lower end of its revenue and adjusted operating growth ranges. This outlook reflects near-term regulatory headwinds in Australia and Bangladesh, unrelenting economic pressure on consumers, and heightened investments in new categories.
- BAT has had success in closing the gap with wide-moat peer Philip Morris, especially in nicotine pouches. For example, in the US, BAT has captured roughly 80% of industry growth to reach 30% market share and become the second-most popular brand. However, promotion is a major driver.
The bottom line: The capital markets day presentation reaffirmed most of our outlook, so we maintain our forecast and our fair value estimates of £47/USD 63 for wide-moat British American Tobacco.
- Shares have declined 10% since the beginning of August, underperforming most tobacco peers. We think shares are undervalued, as we think the market is overly concerned that BAT will fail to reach the lower end of its midterm growth algorithm for the foreseeable future.
- We forecast average annual growth of 3% for revenue and adjusted operating profit (the latter slightly short of guidance). We think that market price-implied expectations underestimate top-line growth from new categories and easing promotions and scale that should drive margin expansion.
