Investors in Imperial Tobacco (LSE: IMT) have experienced a disappointing three months, with shares in the company falling by 3.5%. Certainly, the FTSE 100 hasn’t performed too much better over the same time period, being down 1%, but as a defensive play Imperial Tobacco should have done better.
One reason for the disappointing performance could be weak results. Indeed, Imperial Tobacco released an update today that showed a fall in revenue of 1%, as the company struggled with sales in Russia and the Middle East – a trend that looks set to continue over the medium term. This could have weighed heavily on market sentiment, with the update also showing that sales in Europe continue to fall, as increased regulation seems to be making an impact on the number of smokers and, crucially, the number of cigarettes they smoke.
A strong pound is also not helping Imperial Tobacco, with it and other global companies seeing earnings hit by negative currency translations. However, Imperial Tobacco’s update also showed that the company’s future could be a lot brighter than its performance in the last quarter.
With industry peer Reynolds acquiring Lorrilard in the US, Imperial Tobacco is on track to acquire key US brands such as Winston and Maverick from the companies in order for them to satisfy competition authorities across the pond. In addition, Imperial Tobacco, as highlighted in the update, looks set to acquire blu e-cigarettes, which would give it more potential to stake a claim on what is becoming a fast-growing market.
Indeed, Imperial Tobacco looks well-placed to benefit from the lucrative e-cigarette market (where sales now stand at over $1 billion per annum) as it already has an e-cigarette, Puritane, on sale. This new market segment could help the company to grow its bottom line moving forward, as it battles to offset declining cigarette volumes with price increases.
Still, Imperial Tobacco is forecast to increase earnings by 4% next year, which is in-line with the expected growth rate of the wider market. In addition, it offers a yield of 5%, which is over three times the rate of inflation and well ahead of any bank account savings rate. Furthermore, as this week’s update showed, the company has a lot of future potential both in the e-cigarette market and with regard to new brands that it looks set to acquire.
So, with shares having had a disappointing three months and now trading on a price to earnings (P/E) ratio of just 12.6 (versus 13.4 for the FTSE 100), now could be a golden opportunity to buy shares in the company as it looks forward to a more prosperous long term future.
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Peter Stephens owns shares in Imperial Tobacco. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.