Expectations about British American Tobacco PLC's (LSE:BATS) vaping and other next-generation nicotine products are "seriously overblown", said analysts at RBC Capital Markets as they downgraded the stock.
An 'underperform' rating was slapped on the shares, the equivalent of a 'sell' for some brokers, though RBC's share price target was upped to 3,400p from 3,000p.
In short, BAT is underepresented in the most "competitively advantageous" category, heated tobacco, where its maket share is 10% the size of the dominant Philip Morris International Inc (NYSE:PM), while its biggest business, vapour, is the "most competitively intense".
The RBC analysts said they were "not surprised" when they calculated that BAT's new category business was "not profitable in 2024 once costs are fully apportioned".
BAT's growth targets of 3-5% organic sales and 4-6% EBIT is "unfeasible given adverse category margin mix".
"While BAT's strategy of credibility in each new category is intuitively appealing, it all but ensures a lack of scale in individual categories.
"Contrast this with PMI's dominance in heated tobacco products, and we struggle to see how BAT can meaningfully close the profitability gap."
PMI's EBIT margin in 2024 in smoke-free was estimated to be almost 30%, while BAT's was seen nearer 17%, or 0% excluding a very profitable traditional oral business (snus and snuff).
"So yes, we think new categories obviate the danger of terminal volume declines in cigarettes, but in BAT's case they will impose a severe drag on profitability, owing to adverse margin mix".