British American Tobacco PLC ADRBTI

Morningstar Rating

Stock Research and Analysis

by Philip Gorham, CFA

British American Tobacco's global scale and brand strength, together with the addictive nature of its products, give the company a wide economic moat, in our opinion. There may be some bumps along the way as rising excise taxes and weak consumer confidence Read more

Bulls Say

British American is geographically diverse, with a strong presence in Western Europe, Latin America, the Middle East, and Asia. Only a small proportion of the firm's earnings are derived in the mature markets of Britain and the U.S.

Global volume is split about equally among premium, mid-price, and value products, so the firm should be well positioned to capture share as secular and cyclical shifts in consumer preferences occur.

British American claimed around 13% of the market outside the U.S. in 2008, led by its Pall Mall, Kent, Dunhill, and Lucky Strike brands.

Through its acquisition of Skandinavisk and its test-marketing of snus, British American is targeting adjacent tobacco categories with attractive growth potential.

The firm has a strong record of returning value to shareholders through dividends and share repurchases. Read more

Bears Say

Higher tobacco excise taxes could be on the horizon, as governments around the world grapple with softening tax receipts. An increase in taxes would pressure sales volume.

Although we think British American benefits from the breadth of its product portfolio, continued trading down by consumers to lower-margin subpremium products would be detrimental to the firm's profitability.

British American's operating margins are lower than those of some of its competitors because of a higher average cost of production as a result of its smaller, niche brands.

We think the Chinese market, the largest in the world, will remain effectively closed to overseas firms for the foreseeable future, as the government is likely to be reluctant to loosen its grip on this profitable industry. Read more

Strategy

British American is focused on expanding its footprint in developing markets with favorable growth prospects, both through internal growth and acquisitions. The firm aims to achieve this growth through Read more

Management

In our opinion, British American's board of directors boasts an outstanding array of international executive experience that is fitting for the firm's global strategy. However, with three executives on the eleven-member board, we think the independence Read more

Profile

British American sells more than 300 tobacco brands in 180 countries and holds leadership positions in 50 of its markets, making it the third-largest global cigarette player Read more

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