Today I am looking at cigarette giant British American Tobacco’s (LSE: BATS) (NYSE: BTI.US) earnings prospects in 2014.
Earnings growth set to slow
The breakneck earnings growth of British American Tobacco is expected to slow dramatically in the future. The effect of a rising population, particularly in developing markets where personal income levels are increasing, is helping to push aggregate cigarette demand higher. But overall off-take is slowing markedly from previous decades as consumers wise-up to the health risks and macroeconomic pressures strike spending power.
On top of this, the prospect of accelerating regulatory measures to discourage smokers — from the introduction of plain cartons and larger health warnings across the globe, through to bans on smaller packs in Europe — threatens to exacerbate demand woes in coming years.
Despite fears over an overall contraction in global tobacco demand, however, British American Tobacco’s bag of industry-leading brands continues to drag customers away from its competitors, a critical quality in an increasingly-constricted industry. Indeed, the firm announced in October’s interims that market share across its Global Drive Brands rose strongly in its Top 40 geographies during January-September.
Volumes amongst these key labels, comprising the likes of Dunhill, Kent and Lucky Strike, rose 1.9% in the first nine months of the year. Although British American Tobacco continues to witness heavy sales pressure — total tobacco volumes slipped 3% during the period — the formidable pricing power of these brands continues to drive revenues skywards. And the business is planning to develop its brand power by developing a suite of ‘premium’ cigarettes, a rapidly-growing market segment.
British American Tobacco has punched stunning annual earnings growth for many years now, and boasts a compound annual growth rate of 12.6% over the past five years alone. But City analysts expect earnings expansion to slow in the medium term, with an expected 5% rise this year — to 218.2p per share, anticipated to increase 6% in 2014 to 231.4p.
Still, these projections leave British American Tobacco dealing on a P/E rating of 13.7 for next year, well below an average forward reading of 16.4 for the entire FTSE 100. In my opinion this is great value for a firm with a robust record of earnings expansion, an enviable stable of turnover-driving labels, and a strong position in the set-to-gallop e-cigs sector, a potentially-explosive revenues driver.