Imperial Brands (LSE: IMB) is a FTSE 100 fast-moving consumer goods company (FMCG). It offers a range of cigarettes, tobacco, cigars, and has moved into the new vaping sector. The company is a global operator, and one of the Big Two smoking companies alongside British American Tobacco.
The company released its AGM statement this morning, announcing that tobacco trading was in line with expectations, with a weighting (as previously guided) to the second half of the year.
But what has sent the price tumbling is weaker-than-expected consumer demand for vapour. This is in part due to the US FDA’s ban of certain flavours of cartride-based vapour devices, which has hurt sales.
Is vaping the new smoking?
Many are calling vaping the new smoking, in reality, the jury is still out on the health effects of this activity. In the last century, smoking was promoted as healthy and even encouraged by tobacco companies. In the 21st century, tobacco companies are struggling as a result of regulatory changes.
Bans on smoking in public places, required warnings on cigarette packets, and an increasingly aware demographic group focused on the environment and health have all been headwinds for the tobacco companies.
It was hoped that vaping would be the natural transition from smoking, but regulators are not giving the tobacco companies an easy ride.
Declining fundamental strength
In the last results for Imperial, profit declined to £1,155m from 1,745m. This is a big drop, however, the company is still generating £3,708m in operating cash flow before movements in working capital, compared to £3,505m in the prior period.The company isn’t in trouble yet, but with such headwinds against it, Imperial needs to adapt.
Total tobacco volume declined 4.4% but the net revenue from these products increased 2.7%. While the amount of smokers may be dropping in terms of the percentage of people who smoke, more people are being born and becoming life-long customers of Imperial Brands.
However, the company’s focus is on transitioning smokers to next generation products (NGP) – net revenue in this sector grew 52.4%.
The company wants smokers to choose its products with lower health risks by providing high-quality NGPs.
Vapour products, under the company’s brand blu, are different to all other tobacco-based products as they do not contain tobacco leaf. Blu has established itself in both the UK and the US, and is making inroads across Europe too. In my opinion, buying Imperial Brands stock is a bet on these NGPs being a success.
Given the regulatory issues appearing globally, I think there are plenty of other, better opportunities both for growth and income investing. So Imperial Brands stock can drop as much as it wants – unless I see a serious shift in sentiment for vaping, I would not consider buying any shares.
Michael Taylor does not hold a position in Imperial Brands. 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.