Can Imperial Tobacco Group PLC Make £2 Billion Profit?

Will Imperial Tobacco Group PLC (LON: IMT) be able to drive profits higher?

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Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) to ascertain if it can make £2bn in profit.

Have we been here before?

A great place to start assessing whether or not Imperial can make a profit of £2bn, is to look at the company’s historic performance. Unfortunately, Imperial has not been able to make a net profit of £2bn at any point during the past five years but it would appear that the company is well positioned to do so.

british american tobacco / imperial tobaccoIndeed, for the full-year 2011 Imperial reported a pre-tax profit of £2.2bn, although after the deduction of taxes the company’s reported net profit fell to only £1.8bn.

However, since 2011 Imperial’s net income has slumped even further. Specifically, Imperial reported a net profit of £1.3bn for 2013, as the company suffered from the harsh economic climate within Europe. Europe is one of Imperial’s largest markets. 

But what about the future?

Despite the harsh economic situation within Europe, Imperial’s management remains upbeat about the future. In addition, it would appear as if City analysts are also upbeat about Imperial’s outlook.

In particular, the City has taken a positive view of management’s cost optimisation programme, which is expected to deliver annualized cost savings of £300m per annum until 2018.

What’s more, Imperial’s tobacco sales remain robust with the company reporting within its interim management statement that cigarette sales over the period expanded 3% in key growth markets. One of these key growth markets is the United States, where Imperial sees significant potential.

Indeed, Imperial owns Commonwealth Brands, the US’s fourth largest cigarette company by volumes. Thanks to a renewed sales drive during the past year, USA Gold, the company’s flagship cigarette brand within the US, improved its market share across all key focus regions and profitability had increased.

Furthermore, away from the tobacco side of Imperial’s business, the company has also developed and released its own electronic cigarette brand, although initial sales figures are yet to be disclosed.

Nevertheless, Imperial’s self-help measures and sales growth within key growth markets have led City analysts to conclude that Imperial is likely to report a pre-tax profit of £2.5bn for 2014. As a result, these forecasts lead me to believe that after the deduction of taxes, it is likely that Imperial will report a net profit of £2bn for 2014.

Foolish summary

So overall, based on current City forecasts I feel that Imperial can make £2bn profit. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert owns shares in Imperial Tobacco. 

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