Imperial Tobacco Group PLC’s Diversification Away From Tobacco Is Paying Off

british american tobacco / imperial tobacco

Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) has been one of the FTSE 100’s worst performers over the past five years, lagging the index by around 30%. For the most part, this underperformance has been attributable to investor concerns over Imperial’s ability to return to growth, as sales of cigarettes within Europe — one of Imperial’s biggest markets — continue to decline.

However, Imperial’s recent interim management statement, released only a week or two ago, revealed that Imperial is currently in the process of making a comeback. 

Continued growth

It is no secret that the volume of cigarettes sold around the world is in terminal decline. So then, it came as a surprise when Imperial revealed within its interim management statement that six of the group’s ten ‘growth brands’ all reported rising sales within the period. In particular, the total volume of tobacco sold by Imperial’s growth brands increased by 2%, impressive when the industry as a whole reported a 5% slide in the volume of tobacco sold. Growth brands accounted for 39% of the company’s tobacco net revenue during the first quarter of this year.

Unfortunately, aside from Imperial’s growth brands, the total volume of tobacco sold by the company declined in line with the industry average.

Exciting changes happening

Aside from the volume of tobacco sold by Imperial, there are a few key statements in the company’s interim management statement that really get me excited. For example, the results are in from Imperial’s assault on the US tobacco market, which began at the end of last year, and initial indications are good.

Imperial acquired Commonwealth Brands, the US’s fourth largest cigarette company by volumes several years ago, and since then, the group has been preparing its assault on the US’s domestic cigarette market. The company has restructured its US operations, added more sales staff and redesigned its cigarette offering. And it would appear that this sales drive has begun to work.

Specifically, Imperial revealed within its management statement that USA Gold, the company’s flagship cigarette brand within the US, had improved its market share across all key focus regions and profitability had increased.

Imperial is moving away from tobacco

Another positive takeaway from Imperial’s recent interim management statement was the revelation that, during the period, rising revenue at the group’s non-tobacco business more than offset sliding tobacco revenues.

Imperial’s non-tobacco business offers logistical operations around the world, everything from home parcel delivery to supply chain management and I can’t stress how important this business is for Imperial’s investors. With Imperial’s diversification into logistics, the group is transforming itself into a sustainable long-term business. Indeed, as shown above, rising logistical revenues are offsetting the decline in tobacco sales, setting Imperial apart from its peers and allowing investors to sleep easy. 

Foolish summary

So in conclusion, growth concerns have haunted Imperial’s investors during the past few years but now the company seems to be getting back on its feet. In addition, the group’s non-tobacco operations are starting to prove their worth and are setting the company apart from peers.

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> Rupert owns shares in Imperial Tobacco Group.