Goldman Sachs ups BAT to 'neutral', reinstates Imperial Tobacco at buy

17th Jun 2015 07:30

Goldman Sachs has upgraded British American Tobacco to 'neutral' from 'sell' and raised the target price to 3,270p from 3,010p.It noted that since being added to the 'sell' list on 9 October 2014, the shares are down 2% versus the FTSE World Europe's rise of 7% and the staples sector up 11%.GS said it continues to believe that 2015 will be a challenging year for BAT as transactional currency headwinds erode earnings."However, accounting for the earnings accretion from BAT's stake in Reynolds, and the shares' 13% underperformance versus staples, we believe that its current valuation adequately reflects its future growth prospects."It said the shares trade on a 2016 price-to-earnings ratio of 14.3x, which is a 25% discount to staples, and offer a 7.9% free cash flow yield, versus staples' 5.3%.Risks to Goldman's view and price target include a better/worse-than-expected pricing environment in tobacco, currency fluctuations, higher/lower-than-expected movements in interest rates, and macro changes.Goldman also took a look at Imperial Tobacco, reinstating the stock as a 'buy' and adding it to its Conviction List, with a 12-month price target of 3,765p.It said Imperial offers attractive value, trading on a price-to-earnings ratio of 13x 2016."There is room for further upside to our estimates and price target if management is able to stabilize market share in the US, and we do not rule out Imperial being a target for further consolidation activity in tobacco," said GS.