Smokers keep smoking and this company's profits keep growing.
In the face of a soon to be nationwide ban on smoking in public places, you could be forgiven for thinking that tobacco companies might be having a bad time. But not a bit of it. Just look at today's interims from Imperial Tobacco (LSE: IMT) and you'll see that the company is in rude health. It's growing market share and profits apace with its operations in over 130 countries around the world.
Despite operating in what the company describes as a 'challenging' regulatory environment, Imperial sold over 90billion cigarettes in the first half of its financial year, an increase of five percent on the same period the year before. On the back of this and its other tobacco product sales, it chalked up a one percent increase in revenue of just over £1.5b after duty had been deducted.
Imperial also managed a much larger increase in diluted earnings per share which rose around 10% to 62p.
Ignoring the ethical issues for a moment, in many ways, tobacco is a dream consumer industry within which to operate. With tobacco's reputation as one of the most addictive substances on earth, as investors we see a very predictable revenue stream of repeat business. The industry is all about branding, one of today's salient business buzzwords, and cigarette smokers display a high degree of brand loyalty. The chief executive acknowledged the importance of branding to Imperial's business when he said this:
"We will continue to develop our brand and product portfolio in order to build on our cigarette volume growth and strengthen our world leading position in other tobacco products........"
Another clue to brand strength within the industry exists on the balance sheet, which shows an intangible asset value of just over £3.9b. In fact, if you strip this out of the overall net asset value you will find a negative figure of over £3.1b, which reveals the relatively small tangible asset value and also suggests the sizeable net debt of just over £4b that the company carries -- an indication surely, of the faith that bankers are prepared to put into the predictability of the business model.
A peek at the share price chart confirms that Imperial Tobacco has been a reliable growth company for several years.
Imperial has been driving down costs and winning market share in some of the countries within which it operates. The performance varies between countries however. Surprisingly, the UK continues to be an important growth market for Imperial as the company wins market share, despite the slow decline of the general tobacco market in this country. Imperial now has over 46% of the UK market and these results show an improvement of 20% in UK profit, which constitutes 42% of the company's total profit.
Overall, Imperial's growth looks robust as it continues to seek new acquisitions, and to develop its brand organically -- despite what we might think!
