British American Tobacco plc’s Results Indicate Good Things For Imperial Tobacco Group PLC

British American Tobacco (LSE: BATS) issued its interim management statement for the nine months to 30 September 2015 today emblazoned with the headline “On Track For A Good Year“. 

It’s easy to see why British American’s management is so upbeat about the company’s performance. For the nine months ended 30 September, revenue grew by 4.2% at constant exchange rates and the volume of Global Drive Brands cigarettes sold by the company grew 7.2%.

That being said, the total number of cigarettes shipped by the group during the period decreased by 1.8% to 487bn, and after including the effect of exchange rates, revenue fell 6.5% for the period.

Nevertheless, despite these lacklustre figures, British American did continue to gain market share during the period. The group’s market share in key markets increased by 0.4% during the nine months to the end of September. 

British American has also continued to consolidate the global tobacco industry this year with the acquisition of TDR d.o.o, a tobacco company operating within Eastern Europe and Souza Cruz a Brazilian cigarette producer. 

On track to meet targets

Today’s upbeat trading update from British American shows that the business is on course to meet City forecasts for growth this year. The City is expecting the company to report earnings per share of 207.5p, down 1% year-on-year due to negative currency movements.

Excluding the impact of currency, British American’s earnings per share would be set to increase by 3% to 4% this year. Still, slowing earnings growth isn’t expected to affect the group’s dividend payout.

British American’s dividend payout is set to increase 5% this year. The company’s shares currently support a dividend yield of 4.1% and trade at a forward P/E of 18.5.

Wider industry trends

As one of the world’s largest tobacco companies, British America’s results are indicative of broader industry trends, which is good news for shareholders of Imperial Tobacco (LSE: IMT)

Imperial has already got off to a good start to the year. For the nine months ended 30 June, the company reported that underlying net revenue had risen 14% year-on-year. Volume had increased by 10% during the same period. On a constant currency basis, group tobacco revenue increased 2% for the nine months to 30 June. 

But once again, City analysts expect the strong pound to weigh on Imperial’s results for the full-year. Analysts’ have pencilled in earnings per share growth of 2% for Imperial this year.

However, double-digit growth of 13% is expected for next year as Imperial benefits from its cost reduction plan and the acquisition of US assets, which took place earlier in the year.

If British American’s results are anything to go by, Imperial is highly likely to meet these lofty growth targets. 

Imperial is the cheaper of the two tobacco giants. Based on current City figures, Imperial trades at a forward P/E of 16.8 and yields 4.0%. After factoring in next year’s growth, Imperial is trading at a 2017 P/E of 14.8.