BAT: Impairment Charge Sharpens Focus on New Product Development Strategies

British American Tobacco, or BAT, announced it will record an impairment charge of GBP 25 billion on its acquired U.S. cigarette brands in its full-year financial statements. The market is reacting negatively, with BAT's London-traded stock down 9% in afternoon trading on Dec. 6, but we see no reason to alter our wide moat rating or our GBX 3,900 fair value estimate because we feel our valuation already reflects an appropriate decline rate in cigarettes. Although we think the market is greatly undervaluing BAT's future cash flows, we prefer the strategies of some of BAT's competitors to either invest behind the largest substitute profit pools or to manage the cigarette decline for cash and maximize returns to shareholders. We believe BAT is doing neither effectively, but the impairment charge announcement might be a small step in the right direction.