Why Morgan Stanley Downgraded British American Tobacco Stock
On Thursday, Morgan Stanley made the decision to downgrade British American Tobacco (BAT) stock from Overweight to Underweight, lowering the price target to £25.00 from £28.50. The reasoning behind this move is primarily based on concerns surrounding the anticipated weakness in US cigarette volumes. This decline is attributed to consumer preferences shifting towards downtrading and a growing interest in next-generation products (NGPs), particularly disposable e-cigarettes.
The downgrade reflects worries that BAT may not experience immediate benefits from smokers switching from traditional cigarettes due to the lack of regulatory action against illicit disposable e-cigarettes. As a result, the company is expected to face low-single-digit percentage declines in its US business in fiscal years 2025 and 2026.
Morgan Stanley’s analysis suggests that BAT will not achieve organic growth within the previously stated range of +3-5% until 2027, contrary to the company’s own projections of hitting this target by 2026. This delay indicates that BAT’s growth potential may not be as robust as initially anticipated.
In contrast, Morgan Stanley highlighted Imperial Brands as having better earnings visibility compared to BAT. This is credited to Imperial Brands’ less premium cigarette portfolio and lower exposure to US NGPs, which may provide a buffer against market pressures affecting BAT.
The updated price target and stock rating from Morgan Stanley underscore the firm’s evaluation of BAT’s position in the market, specifically in the US, and its ability to adapt to the changing landscape of tobacco and nicotine consumption.
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