Today I am outlining why Imperial Tobacco Group (LSE: IMT) could be considered a terrific stock for growth hunters.
Legislators up the ante
Mirroring the situation seen across the entire tobacco sector, the effect of escalating legislative clampdowns has caused revenues growth to stagnate at Imperial Tobacco in recent times.
Australia started the ball rolling on plain packaging with the introduction of standard brown packaging in late 2012, and despite the loud protestations of the cigarette industry these measures are tipped to spread across Europe too, with Ireland currently debating these measures and the UK flirting with the issue, too.
The likes of Imperial Tobacco has also had to face rising calls for public smoking bans as well as extra restrictions on advertising, a trend that is also catching on in new geographies including China and Russia.
These attacks took on a new dimension this week when Labour leader Ed Miliband announced that his party would impose a £150m levy on tobacco companies should his party secure victory in next year’s UK general election.
… but growth sectors boost earnings outlook
For many, an increasingly difficult legislative environment — not to mention the rising popularity of counterfeit problems and changing social attitudes towards smoking — makes the likes of Imperial Tobacco a risky stock selection.
Although such concerns are of course valid, I believe that the company is a solid pick for those seeking long-term earnings growth.
Firstly, Imperial Tobacco has terrific emerging market exposure, home to the vast majority of the world’s smokers and where growing populations and personal income levels should drive revenues much higher in coming years. Indeed, the firm still saw net revenues in these so-called Growth Markets march 8% higher during September-June, shrugging off the effect of macroeconomic cooling in these places.
In addition, Imperial Tobacco is also aggressively ramping up its operations in the red-hot e-cigarette market to turbocharge sales. The business rolled out its Puritane device earlier this year, and made huge inroads into the US market when it bought the blu label from Reynolds American back in July.
City brokers believe that current difficulties indicate a mere blip in the firm’s enviable growth story — an expected 3% earnings decline for the 12 months concluding September 2014 would represent the first annual drop for donkey’s years. Indeed, Imperial Tobacco is expected to get back on track from next year when a 4% improvement is anticipated.
These projections leave the business dealing on P/E multiples of just 13.2 and 12.6 times predicted earnings for 2014 and 2015 respectively, well below the benchmark of 15 which represents stellar value for money. I believe that the risks facing Imperial Tobacco are baked in at current share prices and that splendid shareholder rewards are on the horizon.
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Roy does not own shares in any company mentioned.