RBC Downgrades British American Tobacco Amid 'Overblown' Profit Expectations from New Categories

RBC has lowered its rating for British American Tobacco due to "overblown" profit expectations from new categories. The firm's net sales are distributed geographically across the US (43.6%), Americas and Europe (35.7%), and Asia/Pacific/Middle East/Africa (20.7%).

RBC Capital Markets has downgraded British American Tobacco (NYSE: BTI) from "Sector Perform" to "Underperform," citing concerns over the profitability of its New Categories segment. The downgrade comes as RBC expressed skepticism about profit expectations for BAT’s New Categories segment, noting that the business is not expected to be profitable in 2024 once costs are fully apportioned [1].

RBC highlighted competitive disadvantages in key growth segments. In Heated Tobacco, BAT’s business is only 10% the size of dominant competitor Philip Morris International (PMI), whose IQOS device dominates with a 72% market share. Additionally, BAT’s largest segment, Vapour, faces intense competition and low profitability potential [2].

The investment bank also challenged BAT’s growth targets of 3-5% organic sales growth and 4-6% EBIT growth, deeming them "unfeasible" due to adverse category margin mix. RBC forecast that BAT’s group EBIT margin will fall by about 50 basis points annually from 2026 to 2040 [2].

RBC set a 12-month price target of £34 per share, up from £30, reflecting lower capital expenditure assumptions. The current share price is £41.56, with a downside scenario set at £27 and an upside at £45 [2].

The downgrade follows a strong run for BAT stock in 2025, where its total shareholder return almost doubled that of PMI. However, RBC noted that much of the optimism around BAT’s transformation into reduced-risk products had lost touch with the underlying profitability reality [2].

References:
[1] https://www.investing.com/news/analyst-ratings/british-american-tobacco-stock-rating-downgraded-by-rbc-on-new-categories-concerns-93CH-4218566
[2] https://www.investing.com/news/stock-market-news/bat-downgraded-by-rbc-capital-markets-as-profit-outlook-for-vapour-heated-tobacco-4218480