How Imperial Tobacco Group plc Measures Up As A GARP Investment
A popular way to dig out reasonably priced stocks with robust growth potential is through the 'Growth At A Reasonable Price', or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.
Today I am looking at Imperial Tobacco Group (LSE: IMT) (NASDAQOTH: ITYBY.US) to see how it measures up.
What areImperial Tobacco Group's earnings expected to do?
2013 | 2014 | |
|---|---|---|
EPS Growth | 4% | 7% |
P/E Ratio | 11.3 | 10.6 |
PEG Ratio | 2.7 | 1.5 |
Source: Digital Look
Imperial Tobacco Group is expected to post single-digit growth both this year and next, following on from last year's 7% earnings per share (EPS) increase.
The company falls comfortably short of the PEG value benchmark for the year ending September 2013, according to broker estimates, although this is expected to head much lower in the following 12 months. Meanwhile Imperial Tobacco Group's price-to-earnings (P/E) ratio is also above the above the benchmark of 10, although not by much -- a readout below 10 is considered decent bang for your buck.
DoesImperial Tobacco Group provide decent value against its rivals?
FTSE 100 | Tobacco | |
|---|---|---|
Prospective P/E Ratio | 16.6 | 13.6 |
Prospective PEG Ratio | 4.6 | 2.1 |
Source: Digital Look
The tobacco specialist comfortably outperforms the broader FTSE 100 in terms of both forward PEG and P/E ratings. And although the company beats the wider tobacco sector average in terms of P/E multiple, a lower PEG readout suggests
Although Imperial Tobacco Group does not qualify as a classic GARP stock at present, I believe that the firm's ambitious transformation strategy and increasing activities in developing regions to undergird growth further out.
Emerging markets ready to drive growth
Enduring weakness in Europe has crimped earnings growth in recent years, with tobacco net revenues dropping 2% at constant exchange rates in the September-March period, to £3.3bn. This in turn pushed total adjusted operating profit 5.1% lower, to £1.4bn.
Still, the company is making huge headway in emerging markets, helped by its premium brands such as Gauloises Blondes, Davidoff, John Player Special and West. Indeed, net revenues and volumes from these labels rose 5% and 1% respectively in the period, and the company is undergoing huge restructuring to focus on these brands and cut up to £300m in costs through to September 2018.
So even though Imperial Tobacco Group's growth is likely to remain steady, if unspectacular, across the medium term, I am expecting a more streamlined company with improving operations in red-hot geographies to experience accelerating expansion over a longer time horizon.
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