The share price of Imperial Brands (LSE: IMB) has been trending down for what seems like an eternity. Since rising above 4,000p in mid-August 2016, shares in the tobacco manufacturer have just gone down…and down…and down.
Yet recently, the FTSE 100 stock has shown signs of a recovery. Since I covered IMB on 13 December, it has risen more than 10%. Can the shares keep rising? I believe so. Here are three reasons why.
Shift towards value
Value stocks such as Imperial Brands have been out of favour for a long time now. However, just recently, there have been signs that value could be making a comeback.
For example, in the final quarter of 2019, the S&P 500 value index outperformed the S&P 500 growth index by more than 1.5 percentage points (9.93% vs 8.32%). With many growth stocks now trading at lofty valuations, I wouldn’t be surprised to see this shift towards value continue. “Ignore value at your peril,” says John Linehan, chief investment officer of equities at T Rowe Price Group.
Given that Imperial Brands currently trades on a forward-looking P/E ratio of an incredibly low 7.2 (less than half the FTSE 100 median of 15.6), I think it could benefit if investors continue to focus on value.
Sentiment towards tobacco
While the tobacco sector remains out of favour for a number of reasons, I have seen a small improvement in sentiment recently. For example, just yesterday, analysts at JP Morgan said that they see further upside for big tobacco due to the “sustainability of earnings and cash.” They lifted their price target for Imperial Brands to 2,100p from 1,900p – an increase of 10.5%.
Similarly, after the US Food and Drug Administration recently exempted menthol and tobacco from a list of popular e-cigarette flavours that it banned under its new guidelines, analysts at Jefferies said: “We are actually bullish on implications of this final guidance.” So not everyone hates the tobacco sector at the moment.
Insiders are still buying
Finally, it’s also worth pointing out that insiders continue to buy here. In November, I noted that Imperial’s group innovation and science director David Newns had spent £1.4m on the stock, following purchases from outgoing CEO Alison Cooper, CFO Oliver Tant, and chairman Mark Williamson in September.
Since then, a number of other top directors have loaded up on the shares, including strategy director Amal Pramanik (10,000 shares) and senior independent non-executive director Sue Clark (5,000) shares. When company insiders are spending a large amount of their own money on stock, it’s generally a good sign.
Risks
Of course, I won’t deny that there are plenty of risks to the investment case here. Sustainability is likely to become more of a focus for investors in the years ahead and regulatory pressure is also likely to remain intense.
However, when you consider the stock’s absurdly low valuation and its huge dividend yield, and the fact that the company remains cash generative and highly profitable, the risk/reward proposition looks favourable, in my view.
