Assessing British American Tobacco’s Value After a 59.6% Share Price Surge

• Curious whether British American Tobacco is undervalued or has already priced in all its strengths? You are not alone. Questioning the true worth of this well-known stock is only natural with the market’s constant twists and turns.
• Over the past year, British American Tobacco’s share price has soared 59.6%, with an impressive 35.8% return year-to-date. This hints at a shift in how investors perceive its prospects.
• Fueling these gains, recent news around industry regulation and global tobacco product shifts has created a renewed sense of opportunity and risk. Analysts and media have discussed the impact of changing consumer habits and new product lines on British American Tobacco’s future, which sets the stage for further momentum or volatility.
• On our valuation checklist, British American Tobacco scores 3 out of 6 for being undervalued. This means it passes half the major metrics we use to spot a good deal. Next, we will break down those valuation methods. Stick with us for an even smarter way to understand what this score really means.

British American Tobacco delivered 59.6% returns over the last year. See how this stacks up to the rest of the Tobacco industry.

Approach 1: British American Tobacco Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's value by forecasting its future cash flows and then discounting those figures back to today's value. This approach provides a sense of what the business is worth in the present. For British American Tobacco, the latest reported Free Cash Flow is £8.7 billion. Analysts expect the Free Cash Flow to fluctuate over the coming years, with projected estimates such as £8.6 billion in 2026 and £9.0 billion in 2027. These projections, after about 5 years, rely on analytical extrapolation rather than direct estimates, resulting in an expected Free Cash Flow of roughly £9.1 billion in ten years.

Based on these projections and using the 2 Stage Free Cash Flow to Equity model, the intrinsic value of British American Tobacco shares is calculated to be £60.48 each. The DCF model suggests the stock is trading at a 33.7% discount relative to its estimated fair value. This indicates that British American Tobacco shares are currently undervalued in the market.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests British American Tobacco is undervalued by 33.7%. Track this in your watchlist or portfolio, or discover 842 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for British American Tobacco.

Approach 2: British American Tobacco Price vs Earnings

The Price-to-Earnings (PE) ratio is a go-to valuation tool for profitable companies like British American Tobacco. This metric offers an easy way to see how much investors are willing to pay for one pound of company earnings and helps cut through short-term noise by focusing on the underlying profitability of the business.

Growth expectations and risk play a large role in determining what a "fair" PE ratio should be. Higher expected growth often justifies a higher PE, while greater risks would typically warrant a lower one. Comparing British American Tobacco's current PE ratio of 28.7x with the tobacco industry average of 14.5x and the peer average of 13.6x, the stock stands out as being more expensive than its competitors on this metric alone.

Simply Wall St’s proprietary Fair Ratio model factors in the company’s future earnings growth outlook, profit margins, size, market risks, and industry dynamics to deliver a more tailored benchmark. For British American Tobacco, the calculated Fair Ratio is 31.2x, which is slightly above both the industry and peer averages. This nuanced approach is more comprehensive than relying solely on sector or peer group comparisons as it adjusts for factors specifically relevant to the company’s situation.

With a current PE of 28.7x compared to a Fair Ratio of 31.2x, British American Tobacco’s shares are trading just below what this model considers "fair value" for the company. Based on this preferred multiple analysis, the stock appears undervalued compared to its fundamentals and growth prospects.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1411 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your British American Tobacco Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a simple, structured story that puts your perspective on a company, such as British American Tobacco, into numbers and connects your view of its prospects to a financial forecast and a fair value estimate.

Instead of relying solely on traditional metrics, Narratives allow you to tie together your assumptions about future revenue, earnings, and profit margins with a fair value calculation, so you can see if the current price is attractive or not. On Simply Wall St’s platform, millions of investors use Narratives within the Community page to share, refine, and update their outlooks as new events such as regulatory changes or earnings reports emerge, making them a powerful and accessible tool for smarter investing decisions.

Narratives help you decide when to buy or sell by instantly showing whether the fair value from your story is above or below the current market price, and the approach adapts dynamically as fresh information becomes available. For example, some investors see British American Tobacco’s fair value as high as £59.46 based on robust emerging market growth, while others are more conservative, valuing it closer to £30.00 due to regulatory or earnings risks. This shows that your personal Narrative makes all the difference.

Do you think there's more to the story for British American Tobacco? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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