What's going on?
British American Tobacco, the world’s largest publicly traded tobacco company, reported on Thursday that its sales in 2017 smoldered – but it predicted that they would ignite next year, especially as the company takes a deeper drag of the burgeoning business of vapes.
What does this mean?
The news wasn’t all bad: BAT reported a jump in both sales and profit, thanks in part to its recent acquisition of US tobacco company Reynolds American (the industry’s largest-ever deal).
The company’s revenues were below the market’s expectations, however – and the overall number of cigarettes and vapes that BAT sold before acquiring Reynolds decreased as well (although that’s part of a broader trend away from smoking). But as the market for “potentially reduced-risk” tobacco products appears to be rapidly growing, BAT says that it’s poised to deliver in the very near future.
Why should I care?
For markets: Shares in BAT dropped to an 18-month low on Thursday.
BAT’s stock is undervalued compared to competitors like Philip Morris, which investors apparently perceive to have an advantage over BAT in non-traditional tobacco. However, BAT’s acquisition of Reynolds has given the company access to the best-selling vape line in the United States – itself the largest market for vapes in the world! That’s likely why BAT thinks that its revenues from non-conventional tobacco products will double in 2018 (tweet this), and increase tenfold by 2022.
The bigger picture: Vapes, e-cigarettes and the like are lighting a fire under tobacco giants.
The tobacco industry has been contending with higher taxes, tougher regulations and a shrinking customer base for decades. But the smoke signals of change now seem to blowing as the industry invests heavily in non-traditional tobacco products, whose customer base has grown massively in recent years. As their traditional revenue sources are slowly extinguished, the success of major tobacco companies appears more and more to be tied to their ability to market these newfangled smokes.