Key Morningstar Metrics for British American Tobacco
- Fair Value Estimate: GBX 4,350
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
British American Tobacco BATS announced in its pre-close trading update that it was on track for constant-currency growth of about 2% for both revenue and adjusted profit from operations in 2025 (in line with previous guidance). In the US, it took share in combustibles, nicotine pouches, and vapes.
Why it matters: The US business (BAT’s largest at 45% of first-half revenue) continued to improve. Although it has been a drag on companywide results for the last few years, BAT’s US combustibles are on track to return to revenue and profit growth for 2025.
- US combustibles headwinds seem to be easing, as industry volume decline is tracking to slow to 8% for the year. BAT expects to hold volume share but gain about 20 basis points of value share.
- Impressively, despite heavy promotions from competitors, Velo Plus’ share rose to 21.9% in nicotine pouches in October from 6.9% a year ago. Separately, BAT’s Vuse vape is on track to take 70 basis points of share and remains the market leader in the US legal vape market.
The bottom line: We raise our fair value estimates on wide-moat BAT to GBX 4,350/USD 58 from GBX 4,150/USD 55. The increases stem from a more positive outlook on long-term growth, as we now forecast five-year average annual revenue growth of 3.2%, up 80 basis points from our prior estimate.
- The US drives much of our increased outlook. We expect wide-moat Philip Morris’ Zyn to remain the market leader, but BAT’s Velo should hold on to second place in the rapidly growing category. Separately, we expect Vuse to continue to benefit from increased enforcement of illicit vapes.
- Even after increasing BAT’s fair value estimates, shares look fairly valued. For tobacco exposure, wide-moat Altria looks undervalued. We think investors are overestimating the long-term effects of recent headwinds on On nicotine pouch growth and the downtrading of premium cigarettes in the US.
