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The Surprising Buy Case For British American Tobacco Plc

Today I am looking at why considerable brand strength across British American Tobacco (LSE: BATS) (NYSE: BTI.US) is set to keep profits ticking steadily higher well into the future.

Stunning brand power keeps on delivering

British American Tobacco has a stellar record of relentless earnings growth, the company’s blistering performance in emerging markets helping to mitigate the effect of global macroeconomic stress over many years. But it is the robust performance of its ‘Global Drive Brands’ (GDBs) that continues to pull up trees in these regions and defend revenue growth despite a wider slowdown in the cigarette industry.

The strength of the firm’s so-called four prestige labels — namely Kent, Pall Mall, Dunhill and Lucky Strike — helped to push total market share three basis points higher in 2012. And volumes among these marquee brands grew by 2.3% in the first six months of 2013, and now account for more than a third of British American Tobacco’s total volumes.

The considerable pricing power of its GDBs is allowing the company to maintain revenue growth despite a backdrop of falling tobacco and cigarette demand across the entire tobacco space. Although the firm saw stick volumes fall 3.4% in the January-June period, to 332bn units, GDB volumes actually rose 2% to 114bn sticks.

This helped group revenues increase 4% at constant exchange rates to £7.75bn, which in turn propelled adjusted operating profit 6% higher to £3bn. And the considerable pricing power of its key four labels is continues to propel margins higher — on a constant-currency basis British American Tobacco grew operating margins to 38.7% in January-June versus 37.9% in the corresponding period last year.

As well, the brand power of the business’ most valuable brands is allowing it to aggressively grab market share in its ‘Top 40’ key geographies. Strength across the portfolio allowed British American Tobacco to secure business from its competitors in the Asia-Pacific region in January-June, bolstered by strong performances by Pall Mall in Pakistan, Dunhill in Indonesia and Malaysia, and Lucky Strike in The Philippines.

The company also made massive market headway across the whole of The Americas, while its share in much of Eastern Europe, Middle East and Africa also grew rapidly. British American Tobacco is not resting on its laurels and continues to actively develop these brands — as evidenced by its massive Dunhill marketing drive in Indonesia — and I believe that the strength and resilience of these labels should keep profits moving skywards into the long term.

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> Royston does not own shares in British American Tobacco.