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British American Tobacco (BATS) – A value play or a value trap? : UKInvesting


Hello UK Investors!

I’ve created a new YouTube channel (and hence created a new reddit account to associate with it) and have made a video showing my qualitative and quantitative analysis on British American Tobacco, the second largest Tobacco producer in the world by market capitalisation.

The stock is currently trading at levels similar to the lows of the Covid-19 crash and in the video I discuss whether I think it could be a value play, or a value trap, and also provide my intrinsic value calculation using a combination of the discounted cash flow model and future earnings multiples.

I’d appreciate it if you spared some time to take a look at the video and let me know what you think, but a couple of the points I cover are:

Risks:

– The Biden administration are considering the banning of menthol cigarettes, which account for 55% of BAT’s cigarette volume in the US. Furthermore, a research study estimates that banning menthol cigarettes will result in 923,000 US smokers to quit, significantly damaging BAT’s top and bottom line.

– There are proposals for increased regulatory action on tobacco producers to significantly reduce the amount of nicotine in cigarettes, reducing their addictiveness and again harming sales and profits.

– A general trend of increased health consciousness and move away from traditional tobacco products, though the trend of cigarette smokers worldwide still appears to be increasing.

Opportunities:

Key opportunity being a move into the cannabis sector following BAT’s acquisition of a 20% stake in Organigram.

New category products such as non-combustible/vaping products.

Quantitative analysis:

My discounted cash flow shows a potential significant upside in the stock, but using a future earnings multiple approach actually shows a significant downside, with the true intrinsic value likely falling somewhere between the two.

Whether you guys watch the video or not, I’d be interested to hear what your thoughts are on BAT.

Thanks!



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