Tobacco and smoking is big business. The last few years have seen a rise in people attempting to reduce or stop smoking. This has led to the innovation of other forms of smoking and tobacco such as e-cigarettes. Let’s be frank, however, this industry is very much on the decline longer term.
Back in February, before the COVID-19 pandemic had fully strangled the markets, I wrote about British American Tobacco. At the time I highlighted it as a potential opportunity. I still think so, but currently my focus is on one of its rivals, Imperial Brands (LSE:IMB).
Formerly known as Imperial Tobacco, the group is the fourth-largest international cigarette company in the world based on market share. Its brands include Davidoff, West, Montecristo, Golden Virginia, and Rizla. Imperial sells over 250 billion cigarettes a year in 160 countries serviced by over 50 factories worldwide.
Performance & recent events
I would class Imperial as a value stock. However, the FTSE 100 stalwart has seen better days in terms of share price performance. Over the last two to three years, the share price has been declining gradually. The COVID-19-related market collapse saw close to 30% wiped off the Imperial share price.
It has been a turbulent time for the cigarette maker. Full-year results were announced last year, and were below par. Profit fell to £1.69bn from £1.83bn the previous year. This was primarily due to tough trading in the next generation products such as e-cigarettes.
To add to this, there has been uncertainty at the top. At the time of writing, the CEO and chair have been replaced. There has been bad news in the shape of the US banning some flavoured e-cigarettes. In turn, Imperial decided to release a profit warning on its full-year performance.
In a business update Imperial said trading was in line with expectations despite the coronavirus crisis, sending its shares up. Investors often turn to cigarette makers in turbulent times because customers find it hard to break their smoking habit. Imperial also announced a new £3.1bn revolving credit facility.
Consumers may also have stocked up on cigarettes for periods of isolation as governments urged people to stay in their homes to stem the spread of COVID-19.
Imperial’s price-to-earnings ratio sits at just under 16, which does not represent much risk to me. It also increased its dividend per share for the previous five years. This is about as positive as I can get about a company which does have a strong presence in its respective market. However, that said I feel too many factors out of its control put me off.
The fact that last year’s performance displayed clear issues with a new strategy around next generation products is a problem for me. With the US ban also now in place and other larger companies jostling for position, I do not think Imperial will fare well. The US ban on flavoured e-cigarettes will affect it. Do not mistake me in saying Imperial will go bust or struggle. Imperial is huge and will continue to make a profit and sell cigarettes. My overall consensus, however, is I would rather invest my money into other cigarette manufacturers.
Jabran Khan has no position in any shares mentioned. 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.