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What Imperial Tobacco Group plc’s Investment Plans Mean For Earnings Growth

Today I am looking at why I believe Imperial Tobacco Group‘s (LSE: IMT) expenditure plans should deliver solid earnings expansion.

Multi-pronged approach to drive revenues higher

Imperial Tobacco has cited “increasing investment behind our key brands and markets to drive quality growth” as one of its three major pillars to drive earnings higher in coming years. And judging from the strong performance of these labels, particularly in light of wider industry travails, this move looks set to pay dividends in my opinion.

While total tobacco volumes slid 5% during October-December, roughly in line with the wider tobacco industry, Imperial Tobacco saw volumes british american tobacco / imperial tobaccoof its so-called ‘Growth Brands’ rise 2% during the period. These labels — which comprise the likes of John Player Special and Davidoff — now account for 43% of group volumes, up three percentage points from the corresponding quarter in 2012.

These brands are performing especially well in the firm’s ‘Growth Markets’, which include the US and certain parts of Asia, Eastern Europe and the Middle East. Indeed  the firm saw Growth Brand volumes increase 8% in these territories during October-December.

Not surprisingly, Imperial Tobacco is seeking to boost investment in these regions, places that are becoming increasingly important as sales levels in traditional geographies — most notably Europe — continue to lag. Last year the firm boosted its operations in Cambodia by purchasing its local distributor in the country, and more activity looks to be on the cards.

Through its non-tobacco subsidiary Fontem Ventures, Imperial Tobacco is also charging its activity in the high-growth e-cigarette sector, with millions of new ‘vapers’ embracing the new technology each year. The division swallowed up global exclusivity of Dragonite International’s vapour technologies last November, a move which also saw industry expert Hon Lik — billed by many as the investor of the e-cigarette — join the company.

Earnings rebound forecast following tricky 2014

Still, City analysts expect Imperial Tobacco to buck many years of steady earnings growth during the current year, with anticipated earnings of 209.8p per share for the year ending September 2014 representing a fall from 210.7p last year. However, a solid 5% bounceback is anticipated in 2015 to 219.8p.

Such projections leave the tobacco giant dealing on P/E multiples of 11.7 and 11.2 for 2014 and 2015 correspondingly, edging towards the value watermark of 10 and comfortably surpassing a forward readout of 15.4 for industry rival British American Tobacco.

The tobacco industry remains in a state of flux, as stagnating consumer demand in key markets and rising regulatory pressure — from where smokers are permitted to light up through to the introduction of plain packaging — muddies the earnings outlook of the sector’s big players.

But in my opinion Imperial Tobacco’s planned investment programme, combined with hefty restructuring and cost-cutting elsewhere, should underpin solid growth in future years.

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Royston owns shares in Imperial Tobacco Group but does not own shares in British American Tobacco.