The Motley Fool

Imperial Tobacco Group Plc Is Too Cheap For Its Own Good


Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US) is one of this year’s worst FTSE 100 performers. Indeed, year-to-date the company’s shares have fallen 1%, compared to the FTSE 100 as a whole, which has gained 15%.

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This poor performance could be putting some investors off the company. However, I feel that the company is currently undervalued and right now the company could be one of the best opportunities in the FTSE 100.

Valuation is too low

Firstly, Imperial’s current valuation means that the company is currently one of the cheapest tobacco stocks in the world. In particular, if we compare Imperial to its closest London listed peer, British American Tobacco (LSE: BATS) (NYSE: BTI.US) and New York listed peer, Philip Morris (NYSE: PM.US) we can see how undervalued Imperial really is.

Specifically, British American Tobacco currently trades at a historic P/E of 15.9 and Philip Morris trades at a historic P/E of 17.1. However, Imperial currently trades at a lowly historic P/E of only 11.5.

Sales are still robust

What’s more, despite its low valuation Imperial’s tobacco sales are actually stronger than those of peer and international behemoth, Philip Morris.

Indeed, during the first nine months of this year, Imperial’s underlying stick volume of tobacco sold declined 5%. However, during the same period Philip Morris reported that its volume of tobacco sold declined 5.7%.

What’s more, sales of Imperial’s key strategic cigarette brands only declined 1% during the first nine months of this year, while sales of Philip Morris’ infamous Marlboro brand slowed by 5.7%.

That said, Imperial’s sales are still behind those of British American. Still, British American is one of the only tobacco companies in the world that is actually reporting rising cigarette sales. 

Well placed for growth

Having said that, Imperial is still well placed for growth. The company has reviewed its portfolio of 250 cigarette and fine cut tobacco brands and is looking to slim down its offering, focusing on only the most important brands.

Imperial is also driving growth outside of its traditional European market. The company is now focusing on high-growth markets such as Asia and other markets where the company’s market share is less than 15% and there is room for growth.

For example, the company’s most recent growth drive was the acquisition of its Cambodian distributor.

Foolish summary

So overall, investors should not be scared of Imperial’s low valuation and underperformance this year. The company has many opportunities open to it and based on falling sales the company looks more attractive than larger peer Philip Morris.

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> Rupert owns shares in Imperial Tobacco.