Below-consensus third-quarter results from British American Tobacco (BATS) have led Panmure Gordon to cut its price target for the stock.

Revenue growth for the nine months to September 30th came in at 4% in constant currency terms, missing Panmure's assumption that growth would have accelerated from the 4% registering the first half.

Overall volumes declined by 1.2% to 517bn sticks in the nine-month period, missing the consensus estimate of 520bn and Panmure's 522bn forecast. Volumes in the third quarter alone fell by a worse-than-expected 3.4% to 173bn.

"In order to reflect the lower volume performance we reduce FY volume expectations from 704bn sticks to 695bn sticks and given the on-going currency headwinds we now expect reported revenue decline of 0.5% to £15,324m," the broker said.

As such, its adjusted operating profit estimate has been cut by 1.2% to £5,625m for the full year, down from £5,694m previously. Full-year earnings per share (EPS) are now expected to be 204.7p, down from the previous estimate of 206.9p. This represents EPS growth of 5.2%.

With the broker also having cut its forecasts for 2013 and 2014, the target price for the shares has been pared from 3,700p to 3,650p.

Nevertheless, a 'buy' rating for BATS has been retained.

"Tobacco stocks have been weak recently, impacted by negative regulatory news flow and a more general switch out of defensive names. Year to date BATS' shares have underperformed the FTSE All Share by 2.5%, recording an absolute gain of just 3.6%."

The broker says that the valuation - the shares currently trading at 14 times future earnings with a current yield of 4.3% - is "undemanding given the strength of the underlying cash flows".

Shares were down 1.03% at 3,131.5p in mid-morning trade on Wednesday.

BC

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