Imperial Tobacco's Competitive Advantages Remain Intact

Equity analysts like tobacco firm Imperial's portfolio positioning for the medium to long term, and as such the wide economic moat and stable moat trend ratings remain in place

Philip Gorham 19 August, 2015 | 11:59AM

Imperial Tobacco's (IMT) management statement showed that the firm fell slightly behind our full-year forecasts in the third quarter, but not by enough to impact our fair value estimate of £30 for the ordinary shares. We believe the shares are fully priced. Nevertheless, we like the firm's portfolio positioning for the medium to long term, and our wide economic moat and stable moat trend ratings remain in place.

Imperial has opportunities to grow in the US, but the strategy is risky

Constant-currency revenue rose 2%, although the recent strength in sterling remains a drag, and reported revenue fell by 4%. On a headline basis, Imperial appears to be performing in line with its global competitors, but its top-line growth is skewed more towards price/mix than volume. On an underlying basis, excluding the US deals, volumes fell 6% in the nine months to the end of June, a sequential slowdown from the 5% fall in the first six months.

Imperial's Growth Brands posted another strong performance, but the deceleration in volume growth to 10% from 12% explains the firm's overall volume slowdown. We believe this reflects the weak economic growth in emerging markets, and we may lower our near-term estimates accordingly, although this will have little impact on our valuation.

In spite of this slight concern over Growth Market volumes, we expect investors' focus to remain on the integration of the US acquisitions. Although we recognise Imperial's opportunities to grow share organically in the US, we think the strategic options available are fraught with risk. The firm could either attempt to expand its acquired brands by cutting prices and margins, or it could maximise cash generation, with volume continuing to underperform in a declining industry.

Both options have the potential to erode the firm's wide economic moat over a multiyear time frame. For now, though, we believe Imperial's competitive advantages are intact, and the increase in scale generated from the move into the US supports our wide moat rating.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Imperial Tobacco Group PLC2,116.50 GBX0.95

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Philip Gorham  

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