On Thursday, Morgan Stanley (NYSE:MS) downgraded British American Tobacco (NYSE:BTI) stock from Overweight to Underweight, adjusting the price target to £25.00 from the previous £28.50. The firm's decision reflects concerns over the anticipated continued weakness in US cigarette volumes, driven by consumer trends favoring downtrading and the shift towards next-generation products (NGPs), such as disposable e-cigarettes.
The downgrade comes amid expectations that British American Tobacco will not benefit in the near term from smokers transitioning from traditional cigarettes, due to the lack of regulatory enforcement against illicit disposable e-cigarettes. This is projected to result in low-single-digit percentage declines to the company's US business in the fiscal years 2025 and 2026.
Morgan Stanley also pointed out that they do not foresee British American Tobacco achieving organic growth within its previously stated +3-5% range until 2027. This is a delay from the company's own guidance, which had projected reaching this growth target by 2026. The analyst's outlook suggests that the company's growth prospects are not as strong as previously anticipated.
In contrast to British American Tobacco's outlook, Morgan Stanley noted that Imperial Brands (OTC:IMBBY) (IMB) appears to have better earnings visibility. This is attributed to Imperial Brands' less premium cigarette portfolio and lower exposure to US NGPs, which could potentially shield it from the same market pressures affecting British American Tobacco.
The revised price target and stock rating reflect Morgan Stanley's evaluation of British American Tobacco's position in the market, particularly in the United States, and its ability to navigate the changing landscape of tobacco and nicotine product consumption.
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