Key Takeaways:
- The 2-Minute Valuation Model values British American Tobacco stock at $53 per share in 2 years.
- That’s a potential 33% upside today for $BATS.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
British American Tobacco has already climbed over 30% this year while also delivering investors nearly $3 per share in dividends. However, the stock still looks cheap today:
British American Tobacco (BAT) is a global tobacco company that generates strong, consistent cash flows from its legacy cigarette brands. These cash flows allow the company to offer a high dividend for investors.
The company also has growth avenues as it expands into reduced-risk products like vaping and heated tobacco, positioning itself for future growth.
Michael Burry invested heavily in this stock back in the third quarter of 2023, and today, it’s his fifth-largest holding:
Even after rising 30% in the past year, the stock still looks fairly cheap today and offers a 7.6% forward dividend yield.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is British American Tobacco Undervalued?
Forecast
On $BAT’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at about 2% per year and normalized earnings per share (EPS) at a 5% compound annual growth rate over the next 3 years:
View $BAT’s full analyst estimates >>>
For context, BAT’s revenue has been basically flat for the past 5 years, while EPS grew at about 2% per year. That means BAT’s revenue and earnings are expected to improve.
Valuation Multiple
The stock currently trades at around $40/share, which means the stock trades at about 9 times next year’s expected earnings.
Over the past 5 years, the stock has averaged an 8x forward P/E multiple, which means it is a little bit expensive compared to its historical valuation.
We’ll use a 9x forward P/E multiple in our valuation because the business is expected to grow at a faster rate going forward than it has in the past.
Fair Value
3 years from now, analysts estimate that British American Tobacco could reach about $5.23 in normalized EPS. At a 9x NTM P/E multiple, that values $BATS stock in 2 years at $47/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2-year valuation uses 3-year EPS forecast figures.)
In addition, analysts expect the stock to pay $6/share in dividends over the next 2 years. That brings the stock’s total fair value to $53/share.
With the stock trading at about $40 today, this implies that the stock could rise about 15% per year over the next 2 years, or 33% in total:
For reference, the stock market has averaged 10% annual returns over the long term.
So 15% annual returns with British American Tobacco would be great!
Theoretically, it wouldn’t be too hard for $BATS to deliver market-beating returns.
Currently, the stock offers a 7.6% forward dividend yield, and earnings are expected to grow at 5.2% per year.
That means investors would make a 7.6% annual return from the stock’s dividend. In addition, dividends are expected to grow in the mid-single-digits, which would meaningfully add to the return.
Earnings are expected to grow at 5% annually, which should boost the share price. Over the long term, stock prices tend to follow earnings, which means that the stock could appreciate at 5% annually as long as the stock continues to trade at its current valuation multiple.
This adds up to nearly 13% annual returns going forward. Our model says the stock could reach 15% annual returns because we expect it to reach a 9x P/E multiple, which is slightly higher than where it trades today.
TIKR Takeaway
Using the 2-Minute Valuation Model, it looks like British American Tobacco stock could deliver 15% annual returns over the next 2 years.
Of course, this is just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
