By Emma Rumney
LONDON (Reuters) – British American Tobacco (BAT) shares rose almost 3% in early trading on Thursday after the company beat first-half profit forecasts and investors appreciated some positive aspects of the company’s key U.S. business.
The maker of Lucky Strike and Dunhill cigarettes generated over 40% of its revenue in the United States in 2023, mostly from tobacco, but is also trying to increase its revenue from smoking alternatives.
However, the company is facing major difficulties in this important market as pressured consumers switch from more expensive cigarette brands to cheaper alternatives or e-cigarettes.
BAT’s e-cigarettes have lost market share to a flood of illegal disposable cigarettes.
Chief Executive Officer Tadeu Marroco said the company had begun to regain market share in the United States, but business and consumers remained under pressure.
“I don’t expect any major changes in 2024,” he said of U.S. consumer behavior in a difficult economic situation.
The company is unlikely to achieve its goal of generating £5 billion ($6.4 billion) in sales from smoking alternatives by 2025, as the US is a key growth driver, he said.
With increasingly stringent regulations and falling smoking rates in some markets, tobacco investors view the ability of companies to shift their business away from cigarettes and toward alternatives as critical.
Rival Philip Morris International (PMI) is further along in such efforts. PMI raised its earnings forecast on Tuesday, partly due to expected growth in its alternative products.
Although the US market remained difficult for BAT, investors were pleased with some positive developments.
Anthony Sedgwick, co-founder of BAT investor Abax Investments, pointed to the recovery of the company’s market share in the cigarette segment and the strong development in the nicotine pouch segment in the US, where PMI’s product currently dominates.
BAT’s smoking alternatives business also became more profitable in the first half of the year, increasing revenue above expectations, said Thishan Govender, equity analyst at Truffle Asset Management, another BAT investor.
BAT reported adjusted diluted earnings of 169.3 pence per share for the six months to June 30, compared with analysts’ expectations of 165.91 pence.
Shares rose 2.9%, hitting a 10-month high, before paring gains to trade 1.9% higher at 09:35 GMT.
(1 USD = 0.7765 pounds)
(Reporting by Emma Rumney; Editing by David Goodman and Mark Potter)
