British American Tobacco: Reassessing My Hold Rating After July's Surge (Rating Upgrade)

Core Viewpoint - British American Tobacco (BTI) has transitioned from a "Hold" rating to a "Buy" rating due to improved market sentiment, strong stock performance, and positive developments in its business transformation towards smokeless products [2][15]. Business Description - British American Tobacco is a major tobacco company shifting from traditional combustibles (cigarettes) to smoke-free products. The combustibles segment accounted for 80% of revenue in H1 2024, down from 83% in December 2023 [4][5]. Stock Performance and H1 Earnings - The stock has shown a significant increase of 19.5% since the last article, with a notable 15% rise in July alone. H1 2024 results indicated a 7.4% increase in revenue from new categories, while combustibles revenue declined by 2.6% [6][7]. Transformation to a Smoke-Free World - The company aims for half of its revenue to come from non-combustible products by 2035. Recent FDA approvals for e-cigarette products suggest a more favorable regulatory environment than previously anticipated [9][10]. Deteriorating Core Business - The legacy combustibles business continues to decline, with a 2.6% drop in sales in H1 2024. However, regulatory changes that were expected to accelerate this decline have been delayed, providing a more stable outlook for the combustibles segment [10][11]. Dividend Sustainability - BTI currently offers a 10% dividend yield, which is supported by the monetization of its ITC stake valued at $13.3 billion. This development has significantly reduced the risk associated with dividend sustainability [11][12]. Valuation and Market Sentiment - The stock appears undervalued based on DCF models, and recent positive developments have shifted market sentiment, leading to a surge in stock price. The current price-to-earnings multiple is at its lowest in a decade, indicating potential for further growth [12][13].