BAT's first-half profit beats estimates, US business returns to growth

British American Tobacco (BAT) reported a 1.7% rise in first-half profit at constant currency, surpassing expectations with adjusted diluted EPS of 162 pence. This performance was primarily driven by a 3.7% constant currency revenue growth in the U.S. and robust demand for new categories, notably Velo nicotine pouches, which saw 3.9% sales growth, underscoring the company's progress in offsetting traditional tobacco declines through diversification.

Analysis

British American Tobacco (BATS) reported a solid first-half performance, with constant currency profit rising 1.7% and adjusted diluted earnings per share of 162 pence, significantly beating the company-compiled consensus of 154.8 pence. This outperformance was primarily fueled by a resurgence in its U.S. business, which posted 3.7% revenue growth at constant currency. Critically, the company's strategic pivot away from traditional cigarettes is showing tangible results, as sales in its 'new categories' segment grew 3.9%, largely driven by strong demand for its Velo nicotine pouches. This execution demonstrates progress in a competitive environment where peers like Philip Morris and Altria are also vying for market share in next-generation products. However, the report also includes a note of caution from an external AI-driven analysis, which suggests that despite the positive operational headlines, BATS may not rank as a top-tier undervalued investment, introducing a contrarian perspective on its valuation.

Key Decisions for Investors

• Investors should view the earnings beat and U.S. market recovery as positive indicators of BAT's operational execution and the viability of its strategic pivot to new categories.
• It is prudent to benchmark BAT's new category growth, particularly for Velo, against competitors like Philip Morris and Altria to assess its relative market share and long-term competitive positioning.
• Despite the strong results, the mention of an external analysis questioning the stock's valuation warrants further due diligence to determine if the current share price already reflects the company's growth prospects.