1202 Monday 12 November 2018

Stock in British American Tobacco has gone up in smoke this morning upon reports that the US Food and Drug Administration (FDA) may ban menthol cigarettes for sale in America. As the news crossed the wires early today, shares in BAT.L dropped as much as 11.5%, representing their lowest price since 2014. The year so far has been a drag on the company with a near 40% drop from their 4,940p price in January.

The blow for BAT will perhaps hurts even more than it should as their exposure to the menthol market was strengthened only last year with their £38bn acquisition of RJ Reynolds which produces Newport cigarettes, one of the most popular menthol brands. According to an analyst from Morgan Stanley, menthol cigarettes represent 25% of the business for British American Tobacco and they are the most exposed to the potential risk of a ban coming in. The tobacco industry, including e-cigarettes, has been in focus recently as regulators seek to remove flavoured products in order to curb the rise in popularity within the younger demographic.

Despite the negative news, brokers including Credit Suisse and Liberum Capital have set buy and outperform recommendations on BAT in November and this morning, Barclays Capital set a new target price of 4,000p with their overweight recommendation. This news suggests that BAT may have hit a floor in their valuation and that the market expects them to recover well. If this target were to be reached, it would represent a 33% increase in valuation of the stock price making this a very interesting investment prospect for the company.

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