UK Tobacco Giants' Earnings Disappoint, But One Soared! Here's Why.

UK Tobacco companies face declining demand due to health concerns, smoking bans and high taxes, which prompt many consumers to quit or switch to vaping products.

BAT Takes Huge Impairment Loss on US Brands, But Soared

British American Tobacco (BAT) reported a huge loss for 2023 due to an impairment charge related to its US business. They decided to write down the value of brands like Camel and Pall Mall,  in addition to an impairment of the goodwill from their 2017 acquisition of Reynolds American. Amounting a total of £27.6 billion, the company said it was hit hard by "macro-economic pressures and proliferation of illicit single-use vapour products". Revenues also declined slightly by 1.3% to £27.2 billion. 

Given the lack of income streams from new segments to replace cigarette sales, BAT's earnings outlook remains challenging. The company forecasts that global tobacco volumes will fall around 3% this year due to poor performance in the US and Indonesia. They said they will shift focus to smokeless products, aiming to get 50% of their revenue by 2035.

Despite the pessimistic news, investors were bullish that BAT may sell part of its nearly 30% stake in Indian peer ITC. The CEO said they are working to get regulatory approval to sell some of its ITC shares, which could increase funds for shareholder returns. BAT shares were up around 8% as investors welcomed the move towards share buybacks.

Analysts said that in addition to the potential ITC stake sale, the market was relieved that BAT's dividend extended its 25-year dividend growth after some concerns it could be cut. The yield is around 10% at the current price. In contrast, BAT's rival Philip Morris International missed analyst expectations for its quarterly profit and full-year forecasts, weighing on its shares.

Phillip Morris Takes Hit From EPS Miss

Phillip Morris' share price declined after announcing its latest financial results. While total revenue increased 11% to $9.05 billion, beating analyst forecasts, earnings per share fell year-on-year to $1.36 but was above expectations of $1.45. Price rises and currency fluctuations drove revenue growth, as organic sales volume rose by a more modest 8.3%.

Analysts noted disappointing growth across cigarettes and heated tobacco unit (HTU) shipments, which fell 0.5%. HTU volumes increased by 6.1%, but this was considered underwhelming compared to the 11.6% growth reported earlier by BAT. Heated tobacco unit shipments of 33.97 billion also failed to meet the consensus forecast of 35.32 billion.

EPS guidance of $6.30-6.44 for the full year further dampened investor sentiment for the full year, below the $6.60 expected. However, the company's CEO remained optimistic, doubling down on the company's pivot to reduced-risk products and projecting sales volume growth of 14-16% over the coming months. This suggests Phillip Morris may recover lost ground in the near future.​

BAT Record Low Might Be In

On 6 December, BAT's share price reached a record low after announcing the loss of business in the US. With this news now reflected in the share price and an increase following the sale of ITC shares, the share price will need to surpass 2570 and 2750 to increase further potentially. 2750 may act as the upper "neckline" limit of a potential "head and shoulders" pattern, with a major correction expected at this level. Until this point, the share price trend remains positive as it trades above the upper limit of its rising channel. However, closing below 2360, the initial gap open could change the dynamics, exposing the share price to dropping as low as 2250 or even a new record low.

Source: SpreadEx/ British American Tobacco

Key Takeaways

BAT reported a huge loss due to an impairment charge related to its struggling US business. Revenues also declined slightly by 1.3% to £27.2 billion, with BAT's outlook difficult as global tobacco volumes are forecasted to fall around 3% this year. However, investors were optimistic the company may sell part of its stake in Indian peer ITC. BAT shares rallied around 8% on the news of a potential stake sale and maintained a dividend. In contrast, Phillip Morris's share price declined after missing analysts' expectations. While revenue increased by 11%, EPS fell, and growth in HTUt shipments was disappointing.