British American Tobacco Shares Downgraded to Underperform, Despite Outperforming

British American Tobacco (LON:BATS) experienced a pullback in its share price today, reflecting investor concerns following a downgrade and a series of unsettling developments. BATS shares are currently trading down 1.83% today, extended the drop in the last 9 trading days to 7.1%.

The downward pressure on British American Tobacco shares intensified following RBC Capital's decision to downgrade the stock to ‘Underperform' from ‘Sector Perform'.

The firm also adjusted its price target to 3,400p, a rise from the previous 3,000p. This adjustment, however, was overshadowed by RBC's skepticism regarding the profit potential of British American Tobacco's newer product categories, which they believe are unlikely to achieve the necessary scale to meet expectations.

This perspective casts doubt on the company's strategic shift away from traditional tobacco products.

Adding to the uncertainty, Soraya Benchikh, British American Tobacco's Chief Financial Officer, unexpectedly resigned after a brief 15-month tenure. While she cited the pursuit of new opportunities as the reason for her departure, the timing of the resignation raised eyebrows, triggering a share price decline of up to 2.8%.

The company also announced a significant £6.2 billion provision to address ongoing litigation in Canada, where British American Tobacco faces substantial claims related to the health impacts of its products. 

Beyond these company-specific issues, British American Tobacco is navigating broader industry challenges. Competition from cheaper cigarette brands, particularly in the U.S. market, is intensifying. Japan Tobacco International (JTI) anticipates that lower-priced cigarettes will account for over 40% of the U.S. market by 2027, as consumers increasingly opt for more affordable alternatives to premium brands like British American Tobacco's Newport.

The company's U.S. business has already experienced a decline in cigarette volumes, reporting a 5.2% decrease in 2024. This decline has been attributed to heightened competition and regulatory pressures, including the proliferation of illicit vaping products.

Despite the recent pullback, British American Tobacco shares have been on a notable rally this year, propelling the price to it's highest level in seven years. Gains of 38.18% on a YTD basis will certainly have bulls in buoyant mood, looking for support to step in at 4,000p. Whilst the bearish tone of RBC Capital has raised questions, the average price target on the street of 4,129p continues to suggest some upside remains.