Is British American Tobacco a Buy?

With all the buzz surrounding Altria (NYSE: MO) dropping $13 billion for a 35% stake in electronic cigarette leader Juul Labs and Philip Morris International (NYSE: PM) awaiting approval from the Food and Drug Administration for its IQOS heated-tobacco device, it's easy to forget about British American Tobacco (NYSE: BTI), the second-biggest global tobacco company by revenue.

A handful of setbacks have caused its stock to be halved over the past year, a worse performance than either of its rivals. With the market for traditional cigarettes still declining and the e-cigarette market in a state of flux, let's take a look at whether British American Tobacco is a stock to buy at this new, lower price point.

Diminishing returns

After the acquisition of Reynolds American, the U.S. became British American's biggest market representing almost 40% of total net sales. Cigarette volumes, however, are falling at about 4% annually and though they remain the largest source of revenue for the tobacco giant by far, like its rivals, British American tobacco is looking ahead to a smoke-free future and is counting on its next-generation products to lift sales going forward.

In its second-half update released in mid-December, British American said U.S. volumes of its Vuse e-cig were up 30% from the year-ago period, but it had suffered a total recall earlier in the year for its Vuse Vibe device because of problems with its battery overheating, causing a potential risk of fire.

Although the volume increase suggests it has moved beyond the recall, and the national rollout of its newest version, the Alto, has reached 55,000 stores, its market share continues to decline as Juul surges forward. Even though Vuse is the second most popular e-cig on the market (though it had once been the market leader), its share has since shrunk to just 9% while Juul's share is now over 76%.

A change of perspective

It also comes as e-cig sales in Japan, currently the most important market for the devices, stalls, though even there it trails far behind the market leader Philip Morris, whose IQOS has an 85% share.

The diminished performance has caused British American to trim its full-year guidance. It previously expected sales for its next-gen products to hit about $1.3 billion this year, but it now anticipates they'll come in at around $1.1 billion. British American also warned that currency fluctuations would hit harder than previously expected, swiping full-year adjusted earnings-per-share growth by 7% instead of its previous guidance of 6%.

One area that could perhaps offer an opportunity is marijuana, but British American CFO Ben Stevens has said that although they're studying the market, they have no plans to enter it either through acquisitions or marketing partnerships. Altria had also said that, but at the beginning of December, it invested $1.8 billion for a 45% stake in Canadian cannabis producer Cronos. If British American's fortunes continue to worsen, it, too, could have a change of heart.

Trying harder

Although the global tobacco player is playing second fiddle to its rivals, it has been investing billions in new e-cig products, is looking to enter the U.S. market with its own heated-tobacco device, has seen its market share grow in traditional cigarettes, and pays a dividend that currently yields 8.2% annually.

Its revenue does continue to rise because it still has pricing power in an inelastic cigarette market, and operating profits are still expanding. At more than 50% off its year-ago price, it may just be worth it to take a position in British American Tobacco for the dividend while waiting to see if it can turn its business around.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.