British American Tobacco Shares Fall Ahead of Q1 Earnings

Source from:  The Street 04/25/2016

Global tobacco company, and defensive holding, British American Tobacco's (BTI) shares have performed strongly on the London Stock Exchange this year, rising by 10%. The company's brands include Lucky Strike and Pall Mall.

However, the shares have fallen back by as much as 3.5% this week, ahead of its Q1 update on Tuesday, on valuation concerns as well as uncertainty over whether or not the group will be able to top 2015's earnings growth rate of 16%.

Despite this recent weakness, brokers still remain reasonably upbeat in their outlook for the conglomerate, with analysts at Credit Suisse and Berenberg suggesting that the shares are fairly valued at current levels, while Jefferies projects further gains for the stock.

The $139 price target assigned to the ADR's by analysts at Jefferies suggests upside of 13.5% which is noteworthy in the context of a defensive company.

Commenting on the outlook for 2016 in a note emailed to clients, Martin Deboo at Jefferies wrote, "Industry volumes should be down only 2%, pricing is decent, disruptive tax and regulation changes are unlikely, and there is M&A spec to keep the pot bubbling."

References to M&A come on the back of rumors that began to circulate earlier in Q1, suggesting that Dunhill could bid for one of its rivals, although shortly after British American's CEO dismissed the case for consolidation in 'Big Tobacco' in the immediate future.

Other key factors that could influence the 2016 outcome for the shares include currency volatility, emerging market economic conditions and the global regulatory environment for cigarettes.

Emerging markets are particularly important to BAT, given that it is a key growth driver, with the company holding the largest market share of all 'Big Tobacco' producers.

This is while recent events in the Indian cigarette industry, where there was an industry wide production stoppage that took place at the national level over uncertainties regarding packaging legislation, demonstrate the potential for business disruption as a result of the regulatory environment. Enditem