British American Tobacco (LSE: BATS) said today that it had acquired TDR and other tobacco/retail assets from Croatia’s Adris Grupa for a total enterprise value of €550m — news of which helped its stock outperform the broader market.
BATS remains a solid buy, but are your savings better invested in British American Tobacco than in two defensive names such us Imperial Tobacco (LSE: IMT) and AstraZeneca (LSE: AZN) if you are after long-term value?
Here are some of the answers you might be looking for.
BATS Offers A Good Entry Point For Value Hunters
In BATS’ size resides its strength.
The bolt-on deal announced today signals that the tobacco maker is paying more attention to inorganic growth — after all, sales in 2017 are expected to come in just line with those that the tobacco behemoth reported in 2009.
Hefty operating profits need a steeper growth rate to render its stock more appealing to value investors although, at 18x 2016 net earnings, BATS doesn’t strike me as being particularly expensive. The stock is flat since early June 2014, but at 3,627p a share you’d do well to add exposure with the aim to record a steady income from dividends — its rich dividend policy promises a yield north of 4% over the next three years — and some capital appreciation.
Imperial’s recent strength on the stock exchange is another reason why it may be a good time to invest in BATS.
Imperial Tobacco: The Valuation Gap Has Now Officially Closed
I am not puzzled by Imperial Tobacco’s rally, but I think that most of its recent gains (+20% year to date, +26% over the last 12 months) should be attributed to takeover talk rather than significantly improved fundamentals, or trading multiples pointing to value.
In fairness, its acquisitive strategy should be praised — Imperial is acquiring four bands that Reynolds American must sell following its purchase of smaller rival Lorillard — but its relative valuation, based on forward earnings and core cash flows, has caught up with that of BATS over the last five weeks of trade (this excludes multiples for book value, according to which BATS still commands a meaningful premium).
True, BATS could be oversold because it seems to lack strategic options, while Imperial Tobacco remains the chief takeover target in the industry — but anyone betting solely on that element will end up being hugely disappointed as soon as this year, in my view.
AstraZeneca: Bad News…
Astra’s own estimates for revenues and earnings are incredibly bullish for the next few years, yet mainly bad news has drawn my attention in recent times. Of particular interest in recent days was Amgen’s detailed decision to dump the Astra-partnered psoriasis antibody brodalumab, due to risk of suicide.
As Jacob Plieth at EP Vantage recently wrote, “it is highly unusual for a discontinuing partner to spell out in such detail the reasons for pulling out, suggesting that the problem is very serious, and that this is not just an excuse to get Amgen out of funding development.” Mr Plieth also noted that in its defence against Pfizer’s takeover attempt last year the group “trumpeted the potential of brodalumab as an underappreciated asset that could bring in $0.5-1.5bn of peak revenues.“
My take is that Astra should be considered by value investors only if its stock dropped to 3,100p-3,400p from its current level of 4,400p, and that’s based on several elements — including the fair value of its assets, its pipeline of drugs, fundamentals, forward multiples and better alternative choices in the pharma space, such as Shire, for instance. The upbeat headline from Reuters today —“AstraZeneca: boosted by positive lung cancer drug update” — did little to lift spirits, with its stock up only 0.6% at the time of writing.
