British American Tobacco Beats Earnings Estimates as Vaping Sales Surge. Why the Stock Is Falling.
The revenue beat was largely driven by the performance of BAT’s ‘new categories’ products, which includes e-cigarettes, heated and oral tobacco.
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British American Tobacco reported full-year earnings ahead of estimates on Wednesday, despite the impacts of Covid-19 as demand for e-cigarettes surged in 2020.
However, the FTSE 100-listed company’s outlook for this year and its warning that the global tobacco market could fall around 3% in 2021 concerned investors as the stock fell more than 4%.
The Lucky Hill and Dunhill cigarettes maker said adjusted operating profit rose 4.8% to £11.37 billion in 2020, while adjusted earnings per share (EPS) grew 5.5% to 331.7 pence, ahead of the FactSet consensus of 330.07 pence.
Full-year revenue was £25.78 billion—3.3% growth at constant exchange rates—beating the FactSet consensus of £25.68 billion. Cigarette volumes fell 4.5% in 2020, but price increases helped sales of traditional tobacco products to rise 2.8%.
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The revenue beat was largely driven by the performance of BAT’s ‘new categories’ products, which includes e-cigarettes, heated and oral tobacco. New categories sales rose 15%, led by a 52% jump in vaping sales, including its Vype and Vuse brands. British American Tobacco also raised its full-year dividend by 2.5% to 215.6 pence per share.
However, the company said the Covid-19 pandemic had hit performance, with an estimated 2.5% headwind to revenue in 2020. The World Health Organization and the U.S. Centers for Disease Control and Prevention have warned that smoking increases the risk when it comes to fighting off Covid-19.
BAT said travel restrictions had hit sales in its travel retail segment, while sales in South Africa suffered from a government tobacco ban between March and August. It also felt a more severe impact on consumption in a number of emerging markets due to the pandemic.
The company warned that the global tobacco industry volumes would fall around 3% in 2021, declining to give specific guidance on the key U.S. market, which it said was dependent on Covid-19 uncertainties. It expected revenue growth of 3% to 5% this year and mid-single digit EPS growth reflecting “continued Covid-19 impacts.”
Looking ahead. The tobacco industry’s transition resembles that of the oil-and-gas sector as it invests in cigarette alternatives amid a gradual decline in the popularity of smoking. Cigarette volumes continued to fall but price increases once again came to the rescue. In fact, given the disruption caused by the pandemic, BAT had an impressive 2020.
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Perhaps most significant is the rate at which people switched to tobacco alternatives—the company added 3 million ‘noncombustible’ product consumers, taking it to 13.5 million and closer to its 50 million target by 2030. In among that, vaping sales surged 52%.
However, investors were left disappointed with the company’s 2021 outlook and the continuing impact of Covid-19 as the stock slumped more than 4%. Citi analysts said the combination of the pound’s strengths and Covid-19 would likely lead to consensus downgrades. Panmure Gordon analysts also noted that BAT’s guidance for mid-single digit EPS growth was lower than its long-term, high-single-digit growth aim, and lagged behind rival Philip Morris International, which has forecast 9% to 11% growth.
“Because of tobacco’s unpopularity with investors, we think dividends are likely to be the primary source of returns for investors, and while new categories may be a crucial growth driver in the future, right now it’s traditional tobacco that funds the dividend,” said Hargreaves Lansdown equity analyst William Ryder. “This may mean dividend growth is curtailed in the near term, especially as BATs focuses on improving the balance sheet.”
