As a giant of the FTSE 100 with a market-cap of £57.4bn, British American Tobacco (LSE:BATS) is a well-respected company. Yet with the stock at 52-week lows, the fall of 26% over the past year isn’t doing it any favours. For long-term investors, could British American Tobacco shares be a great bargain to snap up right now?
Problems to contend with
There are several reasons I can note why the share price has been falling. Performance in the key US market hasn’t been good. In fact in the recent trading update, the CEO commented that “our performance in U.S. combustibles has been disappointing.”
Another problem the business has is changing regulations in the US. California has now implemented a flavour ban on tobacco-related products. More broadly, the Food and Drink Administration is proposing to ban menthol as a flavour in cigarettes. The impact of this shift in policy scares some investors about the negative revenue impact.
Finally, there has been a reshuffle in senior management in recent months. The new CEO, Tadeu Marroco, took the post in May. Since then, there have been numerous changes and appointments. This includes a new chief operating officer and chief strategy and growth officer. Some see this as negative, as it will likely provide a period of uncertainty with the newbies getting their feet under the table.
What the numbers tell us
Due to the fall lower, the stock is certainly looking attractive from a valuation point of view. The price-to-earnings ratio is now at 6.96. Anything below 10 ranks as an undervalued stock, from my perspective.
Another way to assess the value of a company is considering the enterprise value. This can be compared to the market-cap, and is often seen as a better snapshot of the current value of a business. At the moment, the enterprise value is £97.4bn. This is well above the market-cap of £57.4bn. Again, this could suggest there’s a value gap currently on offer.
As for the core financials, I don’t see any major problems. Profit before tax has grown year-on-year since 2019. Generous dividends have been distributed with the yield now at 8.89%.
A slow but likely turnaround
Given the size of the company, I don’t see the share price exploding higher in the space of a few weeks. However, I do feel investors can pick up the stock at bargain levels right now, for long-term gains.
I don’t see any of the current issues as fundamental. Performance in the US can rebound, especially with a focus around non-combustible products. The new management team has the opportunity to bed in and should deliver results in years to come.
Sure, this bargain-of-the-year might not turn around tomorrow. But in the meantime, the healthy dividend yield can provide income while waiting for the share price to turn higher.
