Market Beatdown
For two consecutive times, the only bear on Seeking Alpha on British American Tobacco (NYSE:BTI) (OTCPK:BTAFF), has issued a ‘Strong Sell’ rating on the stock. The stock has generated -2.97% in total shareholder return compared to the S&P 500 (SPY) (SPX), which has gained +6.32% in the same period. This implies an alpha of +9.29% for the Strong Sell view compared to a long position in the market index.
The results show that this analyst has had the right call yet again as everyone else has been overwhelmingly bullish on the stock.
Revised Stance
After the stock underperformed and fell as expected, the analyst has moderated the bearish bias. Instead of a ‘Strong Sell’, BTI is now declared a ‘Sell’.
The analyst remains bearish due to the ongoing disappointments in the US Combustibles, slow-moving regulatory bodies, and a poor diversification strategy.
Continued Struggles in US Combustibles
US Combustibles make up almost 36% of the overall revenue mix. In the H2 FY23 Pre-Close update, the company took a £25 billion ($31.5 billion) impairment charge on acquired US combustible brands as they cut down the useful life assumptions on these assets.
“Mainly relates to some of our acquired U.S. combustibles brands, as we now assess their carrying value and useful economic lives over an estimated period of 30 years.” – CEO Tadeu Marroco in the H2 FY23 Pre-Close Concall
Following this was a revenue guidance update pointing towards the lower end of the previous range.
“Due to the continued weakness of U.S. combustibles, we now expect to deliver group organic revenue growth at the low end of our 3 to 5% guidance range” – CEO Tadeu Marroco in the H2 FY23 Pre-Close Concall, Author’s bolded highlights
From a market share perspective, BTI’s combustibles value share dropped 40bps in H2 FY23. This was only partially offset by stronger performance in non-US combustibles, indicating the overall loss of market share in their primary market of combustibles.
The company attributed the poor performance of US combustibles to inflation and other macro drivers such as high interest rates and consumer confidence.
The company insisted that once macroeconomics improve, the scenario will change, but the analyst remains skeptical about these claims.
The data shows that the consumer confidence is rebounding strongly, raising doubts about the macroeconomic reasons for underwhelming performance. The company’s indicated that the illicit disposable e-cigarette category is cannibalizing regular combustibles, adding another layer of complexity to the issue.
