Shares of British American Tobacco (BTI -8.50%) were getting crushed appreciate a pack of cigarettes today after the tobacco giant took a massive write-down on its “U.S. combustibles industry,” which refers to smokeable products appreciate cigarettes.
As a result, the tobacco stock was down 8.6% as of 1:31 p.m. ET.
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BAT gets a dose of reality
British American Tobacco, which is best known for brands appreciate Lucky Strike, Camel, and Newport, said as part of a broader update that it would take a noncash impairment of around $31 billion, in line with its scheme to “Build a Smokeless World,” and reflecting macro headwinds impacting the U.S. smokeables industry.
The write-downs mostly associate to earlier acquisitions, including Reynolds American, a 2017 deal valued at $49 billion that gave the company popular brands appreciate Camel and Newport.
In addition to the impairment announcement, British American Tobacco confirmed its EPS guidance of mid-single-digit growth and organic revenue growth at the low end of its 3% to 5% guidance range.
The company also said it was seeing strong volume and revenue growth in new categories appreciate Vuse and Velo, and it said that Vuse now had a 46% value share in the U.S., up 500 basis points from a year ago.
A new hole in the balance sheet
The $31 billion impairment is a noncash financial change, so it won’t have a direct impact on the operating business. However, it also seems to make the company’s other tobacco brands look vulnerable, as British American Tobacco finished its most recent quarter with $122.1 billion in tangible assets, making up nearly all of its asset value on the balance sheet. The company also has $42 billion in debt, showing that net tangible assets are now negative on the balance sheet.
The company isn’t in immediate trouble, but the write-down does confess a reality that tobacco investors seem to be ignoring: Replacing cigarettes with next-gen products hasn’t been a smooth transition, and the industry is likely to continue losing customers. While profit streams have been steady thanks in part to price hikes, valuations in the industry seem likely to continue to reject until it’s clear that there’s a long-term growth opportunity here.
BAT stock just hit a 12-year low on the news. Dividend investors may want to take a flyer on a stock that now yields nearly 10%, but earnings are likely to come under pressure as smoking rates continue to reject.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and recommends the following options: long January 2024 $40 calls on British American Tobacco P.l.c., long January 2026 $40 calls on British American Tobacco P.l.c., and short January 2026 $40 puts on British American Tobacco P.l.c. The Motley Fool has a disclosure policy.
