British American Tobacco Faces Sell-Off Despite Earnings Beats

British American Tobacco stock declined 7.3% after delivering earnings better than expected but missing revenue projections. The company's cautious guidance and ongoing legal headwinds contribute to uncertain market sentiment.

Date: 14-02-2025

AI Rating: 5

Overview of Performance
British American Tobacco (BAT) reported an adjusted profit of 362.5 British pounds per share, which slightly exceeded the analyst estimate of 362.2 pounds. However, sales fell short, totaling 25.87 billion pounds against the expected 26.11 billion. This mixed performance led to a significant sell-off, with the stock price dropping 7.3% despite a positive session for the S&P 500.

Revenue Growth
Although BAT experienced a 1.3% year-over-year increase in overall revenue, the reality is that it fell short of expectations. Notably, the smokeless products segment grew by 8.9%, contributing positively to revenue, and represented 17.5% of total revenue. However, the revenue from traditional tobacco products only increased by 0.1%, indicating stagnation in a crucial area.

Profitability Issues
Despite the positive adjusted profit figure, the profitability of BAT was significantly hampered by a substantial 6.2 billion-pound settlement related to Canadian legal issues. This looming legal burden raises concerns about the company's profitability in the near future.

Guidance and Future Outlook
Management has provided cautious guidance for the year, forecasting revenue growth of only 1% and adjusted operating profit growth of between 1.5% and 2.5%. They cautioned that new taxes in Bangladesh and Australia would likely impact their core combustible tobacco products negatively, further clouding future earnings potential.

The longer-term outlook remains cautious, with projected revenue growth of 3% to 5% and adjusted operating profit growth between 4% and 6% for 2026. This tempered outlook does not instill confidence in the stock, especially amidst current challenges.

In conclusion, while BAT's earnings report presented some bright spots, including continued customer acquisition in the smokeless products segment and a sustainable dividend, the negative aspects related to revenue and legal liabilities warrant caution from investors.

Stocks: BTI