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Why I think buying British American Tobacco shares now might be a lucky strike!

The share price of cigarette producer British American Tobacco (LSE: BATS) fell by about 5% on Wednesday as it announced market share losses. The company, famous for its iconic Lucky Strike and Dunhill brands, is generally gaining market share.

While the market shares of traditional tobacco products are declining worldwide, British American Tobacco’s other activities in reduced-risk products – including heated tobacco and vaping pens – are expected to grow by between 30% and 50%. British American Tobacco also reaffirmed its confidence in the achievement of its annual objectives.

There’s no smoke without fire, right?

Well, not in this case. Okay, the stock price is about 20% lower than a year ago, but during this period we had a market consolidation in the second half of 2018. In fact, the evolution of the share price since the beginning of the year is positive with a gain of 18%.

This outperforms its nearest competitor, Imperial Brands, which also trades on the London Stock Exchange, whose share price has fallen by 16% a year to date. In the US, Philip Morris International grew by 16% over the period, slightly less than BATS.

The good performance of BATs in recent months might be a sign of a recovery, reflecting analysts’ optimistic expectations for the future.

New CEO might find a second wind for the company

Wednesday’s update of the group’s turnover is the first since the appointment of the new CEO Jack Bowles to replace Nicandro Durante who led the transition to vaping products but left the share price down by about 50% over the past two years and has been criticised for his poor communication to investors.

Mr Bowles, formerly the company’s chief operating officer, is a strong supporter of reduced-risk products and wants to “create a stronger and simpler business” in response to shareholder expectations.

My heated view

Analysts expect the company’s strong operational performance to last for the rest of the year, so Wednesday’s decline makes the stock more attractive in my opinion.

With a P/E ratio 11 lower than that of its main competitors, BATS is the best deal among the major tobacco producers (whose P/Es range from 12 to 16). The company also pays the most generous dividend, with a current yield of 7%, compared to an industry average of about 6%.

The recent recovery in the BATS share price is another sign of renewed investor interest that might create buying momentum above current levels.

The diversification, through the acquisition of stakes in companies, of tobacco majors such as Marlboro’s Altria and Imperial Brands into cannabis products provides access to a huge market of $17bn. Analysts anticipate strong growth in pharmaceutical cannabis products that could enable this industry to reach $150bn in annual revenues. I expect such an announcement would drive the BATS share price to sky-high levels.

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Jean-Philippe has no position in any company listed here. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.