British American Tobacco Grows EPS With Strong Brands

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Although British American Tobacco sold 2% fewer cigarettes in 2012, its wide economic moat–achieved through its strong brands, addictive product, and vast distribution system–helped the firm increase revenue, expand margins, and grow EPS. During 2012, the firm’s Global Drive Brands grew volumes 3% to 232 billion sticks, led by Lucky Strike (plus-11%) and Pall Mall (plus-3%).

While these strong brands helped to increase constant currency revenue 4% for the year, unfavorable foreign exchange movements resulted in reported revenue declining 1% to GBP 15.2 billion. Improved price-mix combined with the savings realized from factory rationalizations and productivity programs helped to increase the group’s operating margin by 160 basis points to 37.4%. Looking ahead, analysts expect the firm to grow adjusted EPS by 8% to 225p in fiscal 2013 on sales of roughly GBP 15.7 billion.

On an operational front, the company is in the early innings of a worldwide SAP implementation. This initiative will likely be completed in 2016 and should help the firm more adeptly manage its global business. Further, in December 2012 British American Tobacco’s Nicoventures subsidiary (which is focused on nicotine alternatives) was bolstered by the GBP 40 million purchase of CN Creative, a U.K.-based company focused on developing electronic cigarettes. While the e-Cig market is still relatively small, it is quickly gaining volume in countries such as the United Kingdom.

Other tobacco companies are actively participating in the e-Cig market (like Lorillard LO and Reynolds American RAI ) or conducting clinical studies (Philip Morris PM ) to maintain a foothold in this emerging category. While e-Cigs will likely only be a minor part of the global tobacco market during the next few years, they hold the potential to be a disruptive innovation that could be a major boon or bane for the existing tobacco companies.

 

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