BAT shares set to slide after revenue downgrade ahead of H1 earnings

Analysts at Goldman Sachs believe BAT shares could hit £40 with the business capable of becoming a sector leader in vapes and e-cigarettes, despite it downgrading its revenue guidance ahead of its H1 earnings.

British American Tobacco (BAT) shares could rally as high as £40 a share, according to analysts at Goldman Sachs, despite the company downgrading its own revenue guidance ahead of its half-year (H1) results on Friday 31 July.

BAT is trading at £27.15 per share at the time of publication, with the stock down 16% year-to-date.

BAT could emerge as industry front-runner, says Goldman Sachs

Analysts at Goldman Sachs contend that BAT shares could rally as much as 47% after reiterating their ‘buy’ rating for the stock and issuing a target price of £40 a share earlier this month. But is the stock really capable of hitting such a lofty price target?

According to Goldman Sachs analysts, BAT could sees its shares soar due to being well-positioned in next generation products (NGP) like vapes and e-cigarettes, with the company capable of emerging as a ‘relative leader’ within that market.

In a July note to investors, analysts at the US-based investment bank said that BAT was ‘amongst the highest-quality companies in Europe’ and boasted a ‘strong product and geographic portfolio’ within NGPs that could help drive signifcant revenue growth.

‘We believe a multi-category approach and strong brands leaves BAT well positioned to deliver profitable growth as the nicotine industry pivots away from combustible cigarettes,’ Goldman Sachs said. In fact, the bank forecasts that NGPs will generate £4.25 billion in revenues for the BAT in 2025.

‘We believe the direction of travel is clear, and we are confident in BAT’s competitive positioning,’ the bank added.

BAT downgrades revenue growth expectations

Analysts at Goldman Sachs may be jumping the gun slightly with their optimism, considering the myriad of headwinds BAT is contending with in 2020, with the tobacco company opting to downgrade its full-year revenue growth guidance ahead of its H1 earnings.

BAT adjusted its ful-year revenue growth guidance to 1% to 3%, down from the 3% to 5% it previously issued. However, the company doesn’t expect revenues overall to be impacted that severely by the coronavirus pandemic.

‘We don’t see any change in patterns of consumption of cigarettes because of Covid-19,’ BAT CEO Jack Bowles said via a webcast at the company’s capital markets day event. ‘It is a daily purchase, so consumers continue to go to shop, even in Italy and France where tobacco shops are still open.’

Interestingly, the maker of cigarette brands like Dunhill and Rothmans has also downgraded its growth for adjusted diluted earnings per share to a mid-single figure compared with the high-single figure in previously offered ahead of its H1 earnings update.

The company also has pushed back its target of hitting £5 billion in revenues from 2023 to 2025. Unsurprisingly, the stock has fallen 12% since the start of July, with investors anticipating a disappointing set of half-year results later this week.

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