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British American Tobacco shares have been dreadful performers in 2018. Tobacco is becoming the worst performing sector in capital terms, if you exclude dividends, in the whole year. This is out of 39 industry groups in the FTSE All Share index, and given the year we have had, it is up against stiff competition.

Tobacco stocks are down 41% this year, against 9% for the FTSE All Share index. There are a number of reasons behind this rotten showing.

BAT shares face pressure on both prices and volumes

The continuing regulatory drive and  health campaign against smoking in the developed world is beginning to put pressure on both prices and volumes. In October’s trading statement, British American Tobacco (BAT) said that global stick volumes would drop 3.5% in 2018, with the US market down between 4 and 4.5%.

There are also worries that take up of next generation products, such as vapour and tobacco heating options, is proving slower than hoped. Big Tobacco is also worried that it is losing the race to promote next generation products to new players like American e-cigarette maker Juul.

There is also now the threat of an investigation by the US Food and Drug Authority to see whether it should ban some flavoured e-cigarette and vaping products because of what it fears is widespread use among teens.

In October’s trading statement, BAT CEO Nicandro Durante said his firm was on track but currency movements could trim about 7% from that number. Analysts are expecting growth of some 2-3% including currency movements.

Can BAT invent itself out of this hole it is digging?

Analysts will also be focusing on BAT’s ability to cope with price pressure as it continues to invest in next generation products. BAT’s operating profit in the first half was 38.1% on a stated basis.

Next generation has to be where it’s at for British American Tobacco, given that it cannot expect to expand its sales of cigarettes globally in the face of the aforementioned pressures. BAT’s Potentially Reduced Risk Products (PRRPs) are not selling as well as hoped – in October BAT cut its target for the year from £1 billion to £900 million.

BAT says it intends to keep reducing its debt pile, which reached £48.5 billion following 2017’s £42 billion purchase of Reynolds American. It wants to drive down its EBITDA ratio towards 3.0 times by the end of 2019, currency movements permitting.

The Armchair Trader says:

BAT shares have not been looking healthy and have been on a slide since they peaked in the summer at 4203. but even that was off their 52 week high of 5108. BAT shares opened trading at the time of writing at 2725 but are already off more than 1.1% on the day. Looking at that 12 month chart, BATS shares look to us like a busted flush. We just can’t see how they can invent themselves out of the trough they are in.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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