British American Tobacco: On Track for Low End of Guidance as Heated Tobacco Underperforms

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 that it remains on track to reach the lower end of medium-term guidance (3%-5% revenue growth and 4%-6% adjusted profit from operations) for 2026. In reduced risk (18% of 2025 revenue), pouch and vape revenue grew, but heated tobacco sales declined.

Why it matters: We saw few surprises in BAT’s first-half preclose trading update as it largely maintained its full-year outlook. However, in heated tobacco, the firm lost share in several markets in the value segment.

• We expect BAT will be able to adjust to the current challenges in heated tobacco. The launch of Hyper Pro Plus should help stabilize its position in the value category. Meanwhile, it continued to perform well in the premium segment as it gained share with glo Hilo.
• BAT’s other businesses looked solid. Secular combustibles volume declines continue to be offset by price increases, Velo continues to take share in the US pouch market while maintaining global leadership, and Vuse remained the market leader in vapes.

The bottom line: Our fair value estimates for wide-moat BAT of GBX 4,350/USD 58 remain intact. Shares look fairly valued, and we think investors should wait for a more attractive entry point.

• Longer-term, we expect BAT to remain at the lower end of its 3%-5% guidance range. While we think BAT’s reduced-risk portfolio can continue to drive companywide growth, we expect competitive intensity to make it difficult to hit the higher end of its growth ambitions.

Big picture: Recent developments in US Food and Drug Administration regulation bode well for the industry, but particularly for BAT. For example, the allowance of flavors should favor BAT’s top position in the legal market. The primary reason the bulk of the US vape market shifted to illicit Chinese products was the availability of flavors.

• Also, the FDA is likely to expand the accelerated pilot program for pouches, which should reduce the historical multiyear approval process for new nicotine products.