BAT Earnings: New Categories Drive Improvement but U.S. Cigarettes Look Very Soft

British American Tobacco reported an encouraging performance in the first half of 2023, with year-over-year organic revenue growth of 2.6%, slightly better than our forecast. The positive news was an improved performance in the New Categories portfolio, although we remain skeptical about the durability of current levels of growth. On the other hand, and as expected, volume in the U.S. market was weak, implying a negative read-through for Altria's second-quarter results. We believe this is a cyclical impact of high food and fuel prices in the United States, and assuming limited change in the employment rate, we continue to believe the market will rebound going into next year. Although we prefer the portfolio of Philip Morris International, we believe BAT's challenges are more than fully priced in and that the market price presents a defensive investment at an attractive valuation. We retain our GBX 3,900 fair value estimate and wide economic moat rating.