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2 Worrying Reasons To Stub Out Imperial Tobacco Group plc

british american tobacco / imperial tobacco

In recent days I have looked at why I believe Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) looks set to march higher (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, push Imperial Tobacco Group lower.

Heavy Western dependence weighs

Imperial Tobacco is taking steps to address the divergent cigarette growth rates in emerging and established economies, including the closure of many local, underperforming labels across the globe and developing the presence of its ‘Growth Brands’ such as John Player Special and West in these new territories.

These measures are certainly needed as a backdrop of enduring pressure on consumers’ wallets crimps demand for Imperial Tobacco’s goods in its traditional ‘Returns Markets’ across Europe, Australia and Africa. Tobacco net revenues rose just 1% in these geographies during October-December versus a rise of 3% in growth regions.

However, these beleaguered geographies are still the main driver behind group revenues, with Imperial Tobacco holding market share of 15% or more in each these areas. By comparison the firm’s penetration in new geographies is currently far more modest, and Imperial Tobacco has much work to do to rectify this imbalance and drive total revenues higher.

e-cig venture still at early stage

To counter a backdrop of declining demand for traditional tobacco products worldwide, Imperial Tobacco is ratcheting up activity in the hugely-exciting e-cigarette market. And the company received a boost last month when Britain’s number one pharmacy Boots announced that it would be stocking Imperial Tobacco’s Puritane product.

This new market is currently worth between $2.5bn and $3bn per year and accelerating at a rate of knots, as escalating health concerns drive consumption and customers become more familiar with the new technology.

But the e-cig market is currently dominated by a variety of small-scale manufacturers at present, while the tobacco industry’s big players are all becoming increasingly aggressive to get in on the action — Imperial Tobacco itself has filed legal proceedings against nine US competitors in recent days, the Financial Times reported. Against this backdrop, it is too early to say who will emerge as the winners in this explosive new sub-sector.

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Royston owns shares in Imperial Tobacco Group.