Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US)
What is the sustainable competitive advantage?
Imperial’s acquisitions over the years have brought together a large selection of brands, which are all leaders in their own fields.
For example, Imperial owns Rizla, the world’s leading manufacturer of rolling papers,and the iconic Gauloises cigarette brand. The firm also has a 50% interest in Habanos, the exclusive worldwide distributor of premium Cuban cigar brands.
Moreover, unlike its only London listed peer, British American Tobacco, Imperial has a presence within the US tobacco market, after the acquisition the United States’ fourth largest cigarette manufacturer back in 2007, Commonwealth Brands.
What’s more, Imperial is the leading distributor of tobacco and related products within the eurozone, as well as Norway and Estonia.
Still, despite the company’s portfolio of market-leading brands, it would appear that Imperial’s low margin distribution operations are hurting the company’s overall profitability.
Indeed, during 2012, Imperial’s net profit margin was only 10%, while British American’s net margin stood at 35%.
Company’s long-term outlook?
With many well-known and market-leading brands within its portfolio, Imperial is unlikely to be displaced from its position within the industry anytime soon.
Having said that, like all tobacco companies, Imperial is struggling with falling cigarette sales as opinions towards smoking are gradually changing around the world.
In addition, the company’s sales within Europe are coming under increasing pressure as consumers have been hit hard by the economic down-turn and have traded down to cheaper brands or black market substitutes.
Nonetheless, with nearly 230 years of history behind it, Imperial knows how to survive both the good and bad times.
Indeed, the company recently embarked on a plan to cut costs and improve profit margins. According to management this cost cutting plan is already ahead of target. Furthermore, Imperial is working on an electronic cigarette product, which should be ready for launch next year.
Foolish summary
Despite Imperial’s poor performance during the past few years, I believe that the company has many of the traits required in a good share to buy and forget.
Although sales of cigarettes are declining worldwide, Imperial’s diversification into logistics and luxury tobacco products such as Cuban cigars should help the company weather the decline. Moreover, the company’s release of an electronic cigarette and cost cutting plans should put the company of a firm footing for long-term growth.
So overall, I rate Imperial Tobacco as a good share to buy and forget.
