Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at British American Tobacco (LSE: BATS) (NYSE: BTI.US) to ascertain if its share price can return to 3,762p.
Initial catalyst
First of all we need to establish what caused British American’s share price to hit its high of 3,762p during the first half of this year. I feel that British American’s rise to this level was driven not by the company’s performance but by the demand among investors for solid companies with reliable cash flows and secure dividends.
What’s more, British American’s share price hit this level at a time when the FTSE 100 as a whole was trading at a five-year high of 6,723p
Indeed, there appears to be no fundamental reasons for British American’s recent declines. Specifically, since the company’s share price reached this high, performance has only improved.
For example, within the company’s nine-month interim statement management reported that sales of the company’s ‘global drive’ cigarette brands had risen by nearly two percent during the first three quarters of the year.
But can British American return to its former glory?
If we take a look at British American’s valuation, we can see that at 3,762p per share, the company was trading at a historic P/E of 18. This indicates that the company was significantly more expensive that it has been at any point in the last five years. In particular, the company’s five-year average historic P/E is 14.3.
Nevertheless, British American remains a strong company and its recent decline has pulled the company down to a more suitable valuation. Indeed, at current levels the company trades at historic P/E of 15.3. Furthermore, according to City estimates the company trades at a forward P/E of 14.6.
Actually, if we take a look at City forecasts for 2015, British American’s P/E ratio is set to fall further to 13.8, which primes the company for a return to 3,762p if its valuation reverts to the five-year average.
Foolish summary
Overall, despite recent declines, British American looks set for a return to 3,762p per share. The company’s underlying business remains strong and earnings are set to rise by about 11% during the next two years.
All in all, the company is primed for growth so I feel that British American Tobacco can return to 3,762p.