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Is British American Tobacco A Good Value Investment? Source from: Yahoo Finance 05/13/2019 ![]() The cigarette industry is going through a major change as smokers switch to lower risk products. For British American Tobacco (NYSE: BTI) this has led to huge drops in traditional cigarette sales. At the same time, the FDA is talking about banning menthol sales in the United States. Due to these concerns, BTI stock has languished, trading down nearly 29% over the past year. Is this an opportunity for investors? Sea change In response to this sea change, cigarette makers such as British American Tobacco are putting muscle behind these alternative products. Altria (NYSE: MO) recently took a 35% stake in JUUL labs, the maker of e-cigarettes, and BTI recently invested more than $1 billion in a division devoted to alternative products. The problem? Currently, reduced risk products account for less than 5% of cigarette sales in the United States -- it might be some time before they replace traditional smokes' volume. FDA So what does this mean for investors? The decline in traditional smokers and a heavy-handed FDA has been a double-whammy for BTI. The stock is down 32% from its high last year and now trades at an earnings multiple of 11. Compared to its historic average multiple of about 16, this appears cheap. If the fundamentals check out, this could be a buy. Fundamentals Diving deeper, we see that BTI had revenue growth of 23% and earnings-per-share growth of 4.55% over the last three-year period. Importantly, revenue growth has picked up speed while earnings-per-share growth has slowed. This can partly be explained by an increase in the number of shares outstanding. All else equal, investors benefit when a company buys back its shares, leaving a larger slice of earnings for those that remain. This is not the case for BTI, as the company has grown its number of shares outstanding from 1.99 billion in 2009 to 2.29 billion in 2018. However, the company has an outstanding 10-year average return on equity (ROE) of 53.5%, compared to an historic average of about 14% for American companies. The company also has reduced its total debt by 22% over the last ten years although it still has a high debt-to-equity ratio of 66%. Also, for income investors, the company has a juicy yield of around 7%. However, the payout ratio, the amount the company pays out in earnings, is close to 77%. As cigarette volumes wane, it may be difficult for BTI to continue to pay out at this level. Overall, the BTI fundamentals receive a B grade. Final analysis
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