Imperial Brands plc isn’t the only falling knife to avoid today

The world’s tobacco titans have found themselves heavily on the defensive in recent times as the legislative squeeze has intensified across the globe.

I was once a big fan of the likes of Imperial Brands (LSE: IMB) thanks to the formidable brand power of cartons like John Player Special and West, and the FTSE 100 firm’s drive to shut down scores of underperforming labels in favour of prioritising these terrific revenues-driving brands. I myself used to own shares in the London business up until fairly recently.

But the rising headwinds in developing and emerging economies alike, from public smoking bans to the introduction of plain packaging, has caused me to revise my previously-bullish perspective. Indeed, the US Food and Drug Administration’s plans to possibly cut the levels of nicotine in cigarettes to non-addictive levels, which was declared in August, was the final straw for me.

Fighting or flailing?

The industry is fighting a fierce rearguard action to stop sales falling off a cliff, underlined by the vast amounts manufacturers across the sector are ploughing into the e-cigarette sector. Although a fast-growing segment, the revenues created by the likes of Imperial Tobacco’s blu brand remains a very small slice of the overall pie. And besides, the vaping sector is also coming under attack from politicians on health grounds, undermining the long-term sales opportunities of these brand new technologies.

These pressures have seen Imperial Brands’ share value decline 16% over the past six months alone, with analysts warning that earnings growth should keep on slowing. A 9% bottom-line advance is predicted for the year to September 2017, down from 17% last year, and this is expected to cool further to 4% in fiscal 2018.

Many investors may still be drawn in by a very-cheap forward P/E ratio of 11.9 times for the forthcoming financial year, not to mention an abundant 5.3% dividend yield. But the cloudy long-term outlook for the entire tobacco sector is likely to encourage me to keep away from the likes of Imperial Brands.

Another scary sell

I am also underwhelmed by the investment prospects of Netcall (LSE: NET), even if the company’s share price has bounced on Tuesday after the release of fresh trading details. The Hertfordshire firm was last 6% higher from the start-of-week close.

The company, which provides customer engagement solutions to business, advised that revenues fell to £16.2m during the 12 months to June 2017 from £16.6m a year earlier, reflecting its decision to switch to a cloud-based model. As a result, adjusted EBITDA rose just 1% year-on-year to £4.5m.

However, chief executive Henrik Bang said that he was “pleased with progress in the year which was in line with our strategy of positioning the business towards the high-growth cloud market.” I for one will not be investing in the firm any time soon, I’m afraid.

Despite today’s bounce, Netcall still deals at a 24% discount to levels seen at the start of August. And the company still trades on an elevated forward P/E ratio of 24.5 times, created by City predictions of a 2% earnings rise in the current year. In my opinion this could prompt further waves of selling activity should its restructuring package result in prolonged sales slippage.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.