Today I am outlining why British American Tobacco (LSE: BATS) (NYSE: BTI.US) could be considered a terrific stock for growth hunters.
Earnings expansion grinding to a halt
The addictive nature of tobacco smoking means that British American Tobacco and its peers have long been favourites for those seeking reliable earnings and dividend expansion. Indeed, the London-based firm’s earnings’ record over the past five years alone pays testament to this, with earnings rising at a compound annual growth rate of 9% since 2009.
But more rece
ntly the impact of macroeconomic turmoil on customers’ wallets, growing concerns over the health implications of tobacco smoking, a rising black market, and the introduction of a raft of anti-smoking legislation in key markets has caused earnings increases to slow markedly.
These issues are expected to result in British American Tobacco’s first earnings dip for many moons, and a 3% decline, to 211.8p per share, has been pencilled in for this year by City analysts.
… but e-cigs should blast growth higher
Still, I believe that the cigarette giant is in terrific shape to punch robust earnings growth over the longer-term. Indeed, forecasters currently expect British American Tobacco’s resurgence to kick off from next year, when a 9% advance is anticipated, taking earnings to 230.1p per share.
The business has several levers that it can pull to help drive group sales higher in coming years, the most exciting of which is its position at the coalface of e-cigarette technology. British American Tobacco launched its Vype product last July, after it acquired vapouriser developers CN Creative in late 2012, and has aggressively ramped up marketing spend and retail distribution in recent months to boost the new technology’s profile.
With a host of product innovations and roll-outs also apparently scheduled from next year, British American Tobacco is firmly nailing its colours to the e-cigarette mast, as smokers seek an alternative to traditional products. The debate rages on over how much safer the new products are than conventional cigarettes, but booming demand — worldwide sales clocked in at $3bn in 2013 — suggests that users are certainly convinced by the benefits of the revolutionary technology.
On top of this, I reckon that the firm’s stable of traditional tobacco products — including the likes of prestigious labels Lucky Strike and Dunhill — should enjoy splendid revenues growth once pressure on consumers’ wallets in crucial emerging markets eases. The regions of Latin America and Asia are home to the lion’s share of the world’s smokers, and I believe that rising population levels and increased spending power here should underpin long-term sales expansion.