BTI: Transitioning Away from Combustibles with Improved EBIT Margins and Attractive Valuations
British American Tobacco (BTI), the multinational tobacco company, recently reported earnings that missed revenue estimates for the third quarter. However, the company’s transition away from combustible products is gaining momentum, with accelerating growth in new categories and cost savings contributing to improved EBIT margins.
Transitioning Away from Combustibles
Despite the revenue miss, BTI’s third-quarter report showed that the company’s non-combustible products, such as vapes and heated tobacco, grew by 37.7% in the first nine months of 2022. This rapid growth is a clear sign that BTI is successfully shifting its focus towards new product categories in response to changing consumer preferences and increasing regulations on traditional tobacco products.
Improved EBIT Margins
BTI’s efforts to transition away from combustibles have resulted in higher profitability in new categories. In addition, the company has achieved cost savings through operational efficiencies and restructuring initiatives. These factors have contributed to an improvement in EBIT margins, which increased by 1.1 percentage points year-on-year in the first nine months of 2022.
Further Margin Levers Ahead
Looking ahead, BTI has identified further margin levers that are expected to contribute to continued margin expansion. These include pricing actions, cost savings from ongoing restructuring initiatives, and the continued growth of its non-combustible product portfolio.
Attractive Valuations
Despite these positive developments, BTI’s valuation remains attractive, trading at a discount to its peers. This discount is supported by rising earnings expectations, with analysts forecasting earnings growth of 11.6% for the next 12 months.
Impact on Consumers
For consumers, the transition away from combustible products by companies like BTI could lead to more alternatives to traditional tobacco products. This could result in greater choice and potentially lower prices, as competition increases in the non-combustible product market.
Impact on the World
On a larger scale, the transition away from combustible products by companies like BTI could have a significant impact on public health. Reducing the use of traditional tobacco products could lead to a decrease in tobacco-related health issues and associated healthcare costs. Additionally, the growth of the non-combustible product market could create new economic opportunities and jobs, particularly in research and development and manufacturing.
Conclusion
BTI’s third-quarter earnings report showed that the company is on the right track in its transition away from combustible products. Improved EBIT margins, driven by higher profitability in new categories and cost savings, and attractive valuations make BTI an attractive investment opportunity. Furthermore, the transition to non-combustible products could have significant impacts on consumers and the world at large, including greater choice, potential cost savings, and positive public health outcomes.
- BTI reported a revenue miss but is successfully transitioning away from combustible products
- Non-combustible product portfolio grew by 37.7% in the first nine months of 2022
- Improved EBIT margins due to higher profitability in new categories and cost savings
- Further margin levers expected to contribute to continued margin expansion
- Attractive valuations, trading at a discount to peers with rising earnings expectations
- Transition to non-combustible products could lead to greater choice and potential cost savings for consumers
- Could have significant positive impacts on public health and create new economic opportunities
