BAT Beats Estimates as Alternatives Buffer Cigarette Decline

(Bloomberg) -- British American Tobacco Plc’s first-half profit beat analysts’ estimates as smoking alternatives cushioned the continuing decline in cigarette sales.

• Adjusted operating profit rose 5.9% at constant rates to 5.21 billion pounds ($6.32 billion). Analysts expected 5.14 billion pounds.

Key Insights

• Revenue from alternatives such as heated tobacco and vaping rose 27%. The company said it’s still on track to meet the midpoint of its full-year guidance of a 30% to 50% increase, excluding the impact of foreign-exchange rates.
• BAT has a daunting task competing with Philip Morris’s IQOS and upstart Juul, which have the most traction with consumers, according to Piper Jaffray analyst Michael S. Lavery. Product launches in the second half of the year are expected to accelerate growth, the company said.
• The importance of the new category is reflected in declining cigarette volumes, which fell 3.5%. While considered the main driver of future growth, next-generation products like e-cigarettes are coming under scrutiny from the U.S. Food and Drug Administration. BAT said it remains confident in its ability to deal with new regulations.

Market Reaction

• The shares rose as much as 2.3% in early London trading after gaining 18% this year before Thursday.

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