- By GF Value
The stock of British American Tobacco PLC (NYSE:BTI, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $39.62 per share and the market cap of $90.9 billion, British American Tobacco PLC stock gives every indication of being modestly undervalued. GF Value for British American Tobacco PLC is shown in the chart below.
Because British American Tobacco PLC is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 5.6% over the past three years and is estimated to grow 1.37% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. British American Tobacco PLC has a cash-to-debt ratio of 0.05, which ranks worse than 88% of the companies in Tobacco Products industry. Based on this, GuruFocus ranks British American Tobacco PLC's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of British American Tobacco PLC over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. British American Tobacco PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $33.5 billion and earnings of $3.609 a share. Its operating margin is 39.48%, which ranks better than 85% of the companies in Tobacco Products industry. Overall, the profitability of British American Tobacco PLC is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of British American Tobacco PLC over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of British American Tobacco PLC is 5.6%, which ranks in the middle range of the companies in Tobacco Products industry. The 3-year average EBITDA growth rate is -30.4%, which ranks worse than 79% of the companies in Tobacco Products industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, British American Tobacco PLC's ROIC was 5.65, while its WACC came in at 5.86. The historical ROIC vs WACC comparison of British American Tobacco PLC is shown below:
In summary, The stock of British American Tobacco PLC (NYSE:BTI, 30-year Financials) shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks worse than 79% of the companies in Tobacco Products industry. To learn more about British American Tobacco PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.