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Imperial Investment Goes up in Smoke

The Week: Morningstar columnist Rodney Hobson plans to pack up tobacco stocks, but the outlook is bright for Sainsbury's and Vodafone

Rodney Hobson 27 September, 2019 | 9:35AM

cigarette

It smacks of carelessness when two nasty profit warnings come out simultaneously but investors, especially incurably optimistic ones like me, should not blind themselves to the uncertain times we live in. I don’t feel that the London stockmarket on the whole is overvalued, but there are always individual stocks that do not justify their high rating.

Packing up on Tobacco

Tobacco company Imperial Brands (IMB) slumped 13% to stand below 1,800p on a warning that revenue for the year will grow at only 2% and earnings per share will be flat. As recently as February the shares traded at 2,700p.

It’s bad enough that results from Africa, Asia and Australia – a pretty fair slab of the world - are falling short while strong growth in Europe at the start of the year has tailed off in recent weeks. Far worse is that “next generation” products such as vaping that were supposed to offset any decline in under-siege tobacco products are also doing less well than we had been led to believe. An increasing number of wholesalers and retailers in the US are not ordering or not allowing promotion of vaping products as various states threaten increased regulation. That could mean reorganising the supply chain, which will almost certainly involve paying compensation for termination of contracts.

Imps reckons that non-tobacco still provides a significant growth opportunity, which is probably true given that revenue will be up 50% this year, but with vaping now under attack in the US it is not the great opportunity it might have been. It is slightly disconcerting that Imps feels the need “to refine our investment” and one wonders quite what is meant by “a rapidly evolving market”.

Imperial has been my one seriously unethical investment and it has served me well but it now looks to be an indulgence too far. I shall use any rise in the share price to get out.

Lessons to Learn

I’ve never felt any inclination to invest in Pearson (PSON) so at least I was spared another unlucky 13% fall in one day. It’s switched from running Madame Tussauds and publishing the Financial Times to providing schoolbooks in the United States, without quite settling into doing anything successfully.

Weaker than expected trading in US higher education coursework in the key selling season at the start of the academic year means underlying operating profit will be at the bottom end of the projected range. Revenue for the first nine months of the year will be flat.

Pearson calls itself the world’s learning company. Its management has a few lessons to learn. The shares have hit their lowest level for 18 months. They could sink lower.

On the Up

There has been no news of note from telecoms group Vodafone (VOD) for two months, and it was indifferent news at that when second quarter figures came out at the end of July, but something strange has been happening to the shares. After hitting a floor of 127p three times during the summer, the shares have topped 160p and show no signs of pausing for breath. The slump that began at the beginning of last year looks well and truly over unless Vodafone produces another poor quarter’s figures.

The recovery at Sainsbury (SBRY) has been shorter and less dramatic but the shares have managed to rise from 177p to 220p in the past five weeks. After the disappointment of having its merger with Asda blocked, the supermarket is getting to grips with its problems, shutting underperforming outlets, moving Argos stores into Sainsbury premises and stopping selling mortgages. Mike Coupe has had a torrid four years as chief executive. If he can start to deliver at last, the recovery has further to go.

I own shares in both Vodafone and Sainsbury. I’m hoping this isn’t a false dawn for either of them. I just wish I felt a little more confident about it.

 

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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