Imperial Brands (LSE: IMB) share price may have fallen by a third in the last year, but the company continues to have high growth appeal. It’s experiencing a transitional period at present, with demand for tobacco products continuing to fall. However, growth prospects within next generation products remains high and this could be the catalyst for earnings growth in future years.
Of course, it’s not the only growth stock that could generate high returns in the long run. Reporting on Monday was a company which appears to offer growth at a reasonable price.
Improving outlook
That’s Zoo Digital (LSE: ZOO), the provider of localisation and digital distribution services for the global entertainment industry. It released a trading update that showed a strong performance in the first half of the year has continued into the second half. Revenue is expected to be up from $16.5m last year to $28m in the current year. Furthermore, EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be ahead of market expectations.
Encouragingly, localisation services have continued to grow during the period. They’re now expected to represent around 70% of total revenue, while continued investment in its services is also expected to boost earnings growth over the medium term.
In fact, Zoo Digital is forecast to post a 280% leap in its bottom line in the next financial year. Even after a rise in its share price of 585% in the last year, it trades on a price-to-earnings growth (PEG) ratio of just 0.2. This suggests it could deliver further capital growth over the medium term.
Changing prospects
While the near term for Imperial Brands may be more challenging as it adapts to changes in demand for tobacco products, its long-term future appears to be positive. Consumers appear to be embracing less harmful methods of nicotine delivery, such as e-cigarettes. This trend looks set to continue as people become more health conscious and could mean that there is high growth potential in next generation products.
With Imperial Brands having a strong position in the next generation products space following its acquisition of blu, it seems to be well-placed to generate rising levels of profitability. This could prompt a higher dividend, which may prove to be a further growth catalyst in the long run. With inflation moving higher and the stock having a dividend yield of 7.3%, it appears to offer a solid income outlook. And since dividends are covered 1.4 times by profit, they seem to be highly sustainable.
Certainly the prospects for the tobacco industry are relatively uncertain. But in the long run companies such as Imperial Brands could offer high growth, while a wide margin of safety suggests now could be the right time to buy the stock.
