Jefferies starts coverage on global tobacco sector; BAT top pick

Published 09/07/2025, 08:32
© Reuters.

Investing.com -- Jefferies has initiated coverage on the global tobacco sector, highlighting British American Tobacco (NYSE:BTI) (BAT (LON:BATS)) as its top pick, alongside positive views on Philip Morris (NYSE:PM) and Imperial Brands (OTC:IMBBY), and a more cautious stance on Japan Tobacco (TYO:2914) and Altria (NYSE:MO).

The brokerage describes the sector as sitting in “the sweet spot of Staples” due to its combination of modest growth, defensive characteristics, high cash returns, and appealing valuation.

It sees the industry generating low single-digit (LSD) growth from combustibles and a similar contribution from next-generation products (NGPs), with smoke-free alternatives now representing about 16% of global nicotine value.

BAT is viewed as the standout “improver” in the space.

“We see BAT as an underappreciated Smoke-Free improver thanks to the major success of Velo in the U.S. and Europe, a long-term margin improvement trend, high cash returns and attractive valuation,” analyst Andrei Andon-Ionita said.

The company is rated Buy with a 4,800p price target for its London listing and $66 for its U.S.-listed shares.

Philip Morris is the preferred “growth pick,” supported by the leading market position of its IQOS heated tobacco brand and the strong performance of its ZYN nicotine pouch business.

Meanwhile, Imperial Bands is labeled a “value standout” given its low valuation, improving fundamentals, and the early success of its Zone product in the U.S. oral nicotine pouch market.

Both companies are initiated at Buy at Jefferies.

On the other hand, the firm sees limited upside for Hold-rated Japan Tobacco (OTC:JAPAF) due to its smaller exposure to NGPs and elevated valuation.

Altria, seen as the worst-positioned among these names, is rated Underperform due to “Marlboro and Traditional Oral’s share losses and the more demanding valuation.”

Jefferies also noted that regulatory headwinds for combustibles have likely peaked and sees potential tailwinds for NGPs, particularly in Europe and the U.S., where oral nicotine pouches face lighter oversight.

The sector’s re-rating, from 12x to 15x price-to-earnings (P/E) over the past two years, “has further to run,” the broker added, given continued growth as well as “best-in-class”
mid-single to high-single digit dividend yields and rising share buybacks.

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