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Is Imperial Tobacco Group plc Set For Electrifying Earnings Growth In 2014?

International cigarette giant Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) boasts a stunning record of earnings growth over many years.

As one would expect, the defensive nature attributed to such companies’ end markets make earnings much more visible, making them reliable favourites amongst growth investors. But can Imperial Tobacco keep earnings rolling higher in 2014 as structural difficulties enveloping the industry bite?

Earnings expected to waft still higher

Imperial Tobacco’s final results released earlier this month confirmed the escalating problems facing the tobacco industry. Tobacco net revenues fell 1% in year concluding September 2013, to £7.01bn, with volumes slumping 7% to 317bn sticks.

Not only has the company been whacked by enduring macroeconomic pressure on its customers’ wallets, but social concerns surrounding the health implications of smoking have also risen markedly. And news yesterday that the UK government said that it would launch an independent review on introducing plain cigarette packaging, which could see standardised cartons rolled out from 2015, has been greeted by grimaces from the market.

Still, for next year Imperial Tobacco is looking to benefit from the rising popularity of e-cigarettes when it introduces its own product, expected to hit shelves during the first half. Technology research house TechNovio estimates that this market will witness a compound annual growth rate (CAGR) of 30.6% from this year through to 2018, and rivals Philip Morris and British American Tobacco are also anticipated to enter this red-hot growth market in coming months.

City brokers expect Imperial Tobacco’s earnings per share to rise just 3% in the year ending September 2014, to 217p, a result which would represent the lowest rate of growth for many years. Still, the company currently trades on a miserly prospective P/E rating of 10.9, just above the value benchmark of 10 and far below British American Tobacco’s corresponding reading of 15.

Of course Imperial Tobacco can be expected to incur slow earnings growth in the near term as its restructuring programme ratchets through the gears. The company’s transformation plan will see it close hundreds of underperforming, local labels and instead plough vast sums into developing its “Growth Brands” such as John Player Special and West.

Indeed, over the long haul, I expect these efforts to culminate in increasingly tantalising earnings prospects, underpinned by rising demand in emerging markets. The company is steadily expanding its presence in these regions, where rising populations and advancing disposable income levels should ratchet Imperial Tobacco’s top line higher in coming years.

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> Royston owns shares in Imperial Tobacco Group.