Bank of America has upgraded Imperial Brands to a buy rating, signaling that the tobacco giant's long-running headache in Australia is finally easing. The bank argues that Australia's shrinking revenue weight means it can no longer meaningfully drag down the company's overall performance.
What's behind the upgrade?
Australia has been an outsized problem for Imperial Brands because it is a high-margin market. When sales there slump, the impact on group profits is disproportionately large. Bank of America estimates that Australia revenue fell between 45% and 65% in the first half of fiscal 2026, shaving about 2% to 3% off the group's earnings before interest and taxes (EBIT) growth during that period.
But the bank's core argument is simple math: after years of decline, Australia now accounts for only about 1% of Imperial's Tobacco and Next Generation Products (NGP) revenue. That means even a sharp local downturn has a limited ceiling on how much it can dent group-level profits.
"Even if Australia stays a high-margin market, a business that small can only drag group profit so much," the bank noted. "A sharp local revenue drop has a built-in ceiling on how much it can dent group EBIT."
What it means for Imperial's numbers
Bank of America trimmed its earnings estimates for fiscal 2026 through 2028 but kept its price objective unchanged at 3,200 pence. That suggests the upgrade is more about de-risking the stock than expecting a sudden earnings surge. The bank still believes Imperial can hit its fiscal 2026 EBIT growth guidance of 3% to 5%.
The key test will come in November, when Imperial reports full-year results. That print will show whether the "Australia share loss" story is still driving group-level risk or has truly faded into the background.
For context, Imperial Brands is one of the world's largest tobacco companies, with brands like Winston, Davidoff, and Gauloises. Its Next Generation Products division includes vaping and heated tobacco offerings, an area where the company has been investing to offset declining cigarette volumes.
Broader market context
The Australian economy has faced headwinds recently, with consumer spending cooling and inflation remaining elevated. Australian spending cooled in June as shoppers stuck to essentials, a trend that may have affected Imperial's local sales. Meanwhile, Australian business confidence improved as inflation eased, but the overall environment remains challenging for discretionary spending.
Imperial's Australia business is not alone in facing pressure. Other companies with significant Australian exposure have also reported headwinds. For example, BHP's copper output cut dragged the Australian market to a flat close, highlighting the broader challenges in the region.
What it means for investors
For everyday investors, the key takeaway is that Imperial Brands' stock has been weighed down by fears about its Australian business. As that concern fades, the stock's sensitivity to negative headlines from that one market should shrink. That could make the shares less volatile and more attractive to value-oriented investors.
Bank of America's upgrade also highlights a broader investing lesson: sometimes a company's biggest problem is a temporary one. When that problem fades, the stock can re-rate. But investors should still watch the November results closely to confirm the trend.
Imperial's ability to hit its 3% to 5% EBIT growth target will depend on how its core European and U.S. markets perform, as well as the pace of its NGP expansion. The Australia drag may be fading, but the company still faces long-term challenges from declining smoking rates and regulatory pressure.
