Shares in Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US) have made a great start to 2014, being up 4% at the time of writing while the FTSE 100 is down 2% year-to-date. Does this recent share price strength mean that Imperial Tobacco is no longer good value for money? Or, does it still have the growth prospects to merit purchase at a higher price?
Growth Potential
With a dividend yield of 4.9%, Imperial Tobacco’s attraction as an income play is clear. However, what may be surprising to some investors is the earnings growth that has been delivered by the company over the last five years. Imperial Tobacco has grown earnings per share (EPS) in each of the last five years, with growth averaging 9% per annum over the period. This is extremely impressive and comes at a time when many companies were struggling to grow profit at all.
Furthermore, Imperial Tobacco is set to continue to grow earnings in future, with EPS forecasts showing modest gains (around 1%) in 2014 and 5% in 2015. Although lower than the average gains posted in recent years, Imperial Tobacco continues to offer a level of long-term consistency with regard to EPS growth that is difficult to match. Certainly, EPS growth will fluctuate from year to year, but due to demand for tobacco being relatively price inelastic, Imperial Tobacco is likely to show more resilience with regard to bottom-line growth than many of its FTSE 100 peers.
Good Value
Despite shares making a strong start to 2014, they seem to offer good value for money at current price levels. For instance, they currently trade on a price to earnings (P/E) ratio of 11.5, which is considerably below the FTSE 100 P/E of 13.2. Further indication of their attraction at current levels can be seen in the dividend yield which, as mentioned, is almost 5%.
Looking Ahead
While EPS growth forecasts for the next two years are slightly disappointing when compared to the last five years, Imperial Tobacco’s major attraction as a growth play is with regard to the consistency of its growth. Certainly, cyclical stocks will outperform during boom years, but Imperial should provide relatively reliable growth in all seasons. With shares still being good value for money, Imperial Tobacco is a super growth stock at a very reasonable price.
