Shares in FTSE 100 giant British American Tobacco (LSE: BATS) were on smoking form this morning as market participants lapped up the latest set of interim results from the 68bn cap business.
In spite of this healthy rise, I still think the stock offers considerable value. Before explaining why, lets take a look at the most important numbers from todays statement.
Back on track
Revenue increased 4.1% to 12.1bn at constant currency rates over the first six months of 2019, with growth elsewhere more than offsetting the 3.5% decline in cigarette volumes seen over the period.
Its particularly worth highlighting the 27% rise in sales of the companys New Categories products (to 531m) since its this part of the business that will play an increasingly important role in British Americans ability to continue raking in cash going forward.
Broken down, sales of Tobacco Heating, Vapour and Modern Oral products rose 4% (301m), 58% (183m) and 284% (47m) respectively. With further launches planned in H2, British American believes its now back on track to hit the middle of its targeted 30%-50% growth rangein this area.
Despite increased investment in these new products, adjusted operating profit was also up 5.9% at constant currency to 5.21bn. Encouragingly, this number was a slight beat on the 5.14bn expected by analysts.
Still cheap
Considering the above, its perhaps no surprise that the shares were up over 6% this morning. Thats not to say, however, that prospective investors should worry about missing the boat. Even after taking todays gain into account, the stock is still around 40% lower in price than it was a couple of years ago.
I think the market is too pessimistic on British American. A price-to-earnings (P/E) ratio of just 9 at yesterdays close is far below its five-year average valuation of 16.5. Having said that, its now targeting high-single-figure adjusted earnings growth for the full year, Im wondering if todays rise may be the beginning of a sustained (albeit very gradual) recovery.
Lets not forget British Americans income credentials either. A proposed 203p per share total dividend in 2019 gives a yield of 6.5%. Thats clearly way higher than the 4% median across the index, but not so high that a cut looks likely, at least for now. Since it remains confident of generating more than 1.5bn in free cash flow in 2019 even after the payment of dividends, I think those invested purely for the quarterly cash payouts can sleep soundly.
While the decline of traditional smoking continues in the West, its also worth remembering that approximately 1.1 billion people in the world still engage in the habit and that numbers are actually increasing in some countries due to population growth. This surely makes companies like British American far more defensive than your typical technology play whose clients will quickly move on to different products or services at the drop of a hat.
Of course, there are still challenges ahead.
For one, the rising popularity of next-generation products wont be going unnoticed by the US Food and Drug Administration. In addition to the likelihood of further regulation, the FTSE 100 member must contend with competition from rivals such as Philip Morris whose recent shipment volumes have been better than those reported today.
Nevertheless, based on these half-year numbers and its lowly valuation, I continue to be bullish on British Americans future.
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