JP Morgan cuts BAT rating on next-generation weakness

British American Tobacco lags behind Philip Morris International on heated tobacco products (HTP) and faces near-term risks, JP Morgan said as it cut BAT's rating to 'neutral' and its price target for the shares.

HTP are an important part of the global nicotine industry's future and has been gaining in popularity more than JP Morgan expected in the past year, the bank said.

Philip Morris is the clear leader in HTP with an 82% market share and makes profits while BAT is only at the investment stage. This makes Philip Morris attractive, JP Morgan said as it upgraded the maker of Marlboro outside the US to 'overweight' and increased its price target to $105 from $81.

BAT is several years behind Philip Morris in terns of next-generation products, which include HTP, and its increased investment in HTP is likely to hold back earnings growth, JP Morgan said. The bank cut its rating on BAT shares from 'overweight' and reduced its price target to £31 from £35.

JP Morgan analyst Jared Dinges also said BAT faced short-term risks such as a weak first half, disappointment on share buybacks and next-generation products and possible acquisitions. Dinges said his preferred value play in nicotine was Imperial Brands, which retained his 'overweight' rating.