Imperial Brands‘ (LSE:IMB) share price has taken off again following the release of half-year trading numbers. At £19.64 per share, the tobacco titan was last dealing 4.6% higher on Wednesday (15 May).
The FTSE 100 firm has risen an impressive 14% in value over the past month. This makes it one of the index’s best performers in that time.
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Concerns over the future of the tobacco industry continue to loom large. But could Imperial Brands shares still be a clever investment today?
Pricing power
Falling volumes are a familiar story for the cigarette manufacturers. Things were no different for Imperial Brands in the six months to March: stick sales slumped 6.3% in the period to 89.9bn.
But this wasn’t the big story for the Footsie firm. Instead, those half-year results underlined the stunning pricing power of the company’s addictive goods.
Pricing on its products like JPS and Winston cigarettes rose by 8.6% in the period. This drove total net revenues on tobacco and next generation products (NGPs) 2.8% higher, to £3.6bn.
Market share gains
Imperial Brands also saw fresh market gains in the period. It said that improvements in the US, Spain and Australia offset declines in Germany and the UK.
To round off its solid trading update, sales of its NGPs like its blu vapour lines rocketed 16.8% during the first half, Imperial Brands said.
It commented that this was thanks to “building scale in our market footprint and product innovation“.
FX pressures
On the downside, Imperial Brands’ half-year numbers reminded investors of how its wide geographic footprint leaves it vulnerable to currency-related pressure.
On a headline basis, revenues dropped 2.3% year on year to £15.1bn, while operating profit fell 2.6% to £1.5bn.
But adjusted operating profit (which strips out forex movements) rose 2.8% over the period, to £1.7bn.
Yet largely speaking, Wednesday’s release was pretty strong. So what should investors do now?
Here’s my plan
As an enthusiastic value investor, I’m certainly attracted to the low valuation on Imperial Brands’ shares. It potentially leaves room for further significant price gains in the near term and beyond.
Today they trade on a forward price-to-earnings (P/E) ratio of 6.7 times. They also carry an 7.9% dividend yield, which adds an extra sweetener.
But despite this cheapness and those strong half-year numbers, I’m still not tempted to invest. That low valuation reflects Imperial Brands’ high risk profile, and the possibility that its share price — which has fallen almost 30% in the past decade — will remain locked in its long-term downtrend.
As I said at the top, the threat of extinction for the tobacco industry remain substantial. And it’s not difficult to see why, given expert predictions of changing consumer habits.
Analysts at Citibank predict that the US, UK, Australia and parts of Europe will be ‘smoke-free’ by 2050. Legislators are ramping up efforts to make this a possibility, with Britain currently taking steps to ban tobacco sales to individuals born after 2009.
News of surging half-year sales of vapes and NGPs helps reduce the gloom. But as lawmakers take aim at these non-combustible products too, the likes of Imperial Brands aren’t out of the woods.
For these reasons, I think investors should consider buying other UK value stocks instead.
