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These 2 FTSE 100 stocks issued profit warnings this week. Should I buy?

Cruise ship operator Carnival (LSE: CCL) and tobacco group Imperial Brands (LSE: IMB) both issued profit warnings this week. Their shares are now trading, not only at 52-weeks lows, but also multi-year lows.

Is this a brilliant opportunity to snap up two blue-chip FTSE 100 stocks on the cheap, or should investors steer well clear? I’ll give my views on the near-term and longer-term prospects of the two businesses, and on their current valuations.

Earnings becalmed

Despite reporting record third-quarter earnings on Thursday, Carnival warned on full-year profits. It said it expects earnings per share (EPS) of between $4.23 and $4.27, compared with its previous guidance of $4.25 to $4.35. The reduced guidance would leave EPS more or less flat compared to last year’s $4.26.

Management explained that weather-related voyage disruptions, tensions in the Arabian Gulf and a ship delivery delay are responsible for $0.04 to $0.06 of the downgrade, while fuel prices and currency exchange rates account for $0.08.

Discount price

Looking ahead to 2020 and a number of external headwinds, City analysts expect a further year of flat earnings. Forecast EPS of $4.25 (345p at current exchange rates), puts Carnival on a price-to-earnings (P/E) ratio of just 9.6, with a running dividend yield of 4.8%.

The P/E is not only at a significant discount to the company’s long-run historical average of around 15, but also below the 12 level that it has traded at during previous times when the growth environment has been muted.

The current valuation looks highly attractive to me, particularly as Carnival is a well-managed business, with a dominant position in the industry thanks to its portfolio of nine of the world’s leading cruise lines. As such, I’d be happy to buy the stock and its 4.8% dividend yield today, and hold it for the long term.

Feeling Blu

Imperial Brands’ profit warning on Thursday was a result of an environment of heightened regulatory uncertainty around the vapour category in the US. This has seen an increasing number of wholesalers and retailers not ordering or not allowing promotion of vaping products, such as Imperial’s myblu.

Management said group net revenue growth the year is now expected to be around 2%, compared with previous guidance of a range of 1% to 4%, or above. Meanwhile, EPS is now expected to be flat, versus previous guidance of the lower end of 4% to 8%.

Bargain basement

Investors have different views on the long-term prospects for the tobacco industry. Bears see structural decline in the volumes of traditional products, and are avoiding companies in the sector like the plague.

Bulls, including me, believe pricing power can offset volume declines, and that next generation products (NGPs) and potential moves into other areas, such as cannabis, offer tobacco companies a viable future. It should be noted that despite uncertainty around the vapour category in the US, Imperial has given guidance of 50% revenue growth for its NGP business.

Based on the group’s guidance of flat EPS (272.2p), the stock trades on a bargain-basement P/E of 6.5. Meanwhile, there’s been no change to its guidance for a dividend increase of 10% above last year’s level. This implies a payout of 206.6p and gives a yield of 11.7%.

My optimistic view on the future of the industry, and Imperial’s cheap valuation and high yield, lead me to rate the stock a ‘buy’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival and 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.