Shares in tobacco giant Imperial Brands(LSE: IMB) have bounced back by as much as 20% since plunging to a multi-year low of 2,298p in March. Could further gains be around the corner, or is profit taking now on the cards?
Wednesday's first-half results gives me confidence in the company's ability to weather structural headwinds facing the tobacco industry. Although adjusted operating profit fell by 2.2% in constant currency terms, it exceeded analysts' expectations, as cigarette volumes declined slower than expected and the company achieved higher prices over the period.
Management actions to more effectively allocate capital are also beginning to show signs of progress, after a £2bn disposal of non-core tobacco products in the US and a fall in adjusted net debt to £12.7bn. It also said its cost optimisation programme is on track to deliver £100m of annual savings in the full year.
At the same time, Imperial Brands continues to invest in next generation products. It's seeing encouraging growth in its vaping business and has a strong pipeline of exciting new products, which could be brought to market in the coming year.
Sure, concerns about a stricter regulatory environment and the long-term decline in the smoking population will continue to put off some investors, but I believe much of these risks are already priced into its shares.
Although these structural headwinds will likely slow earnings growth going forward, I reckon management actions and growth in next generation products will offset much of the impact. The company is doing better than its competitors in many of its key markets, with volumes declining at a slower pace than the industry as a whole and the company gaining market share -- yet valuations for the group remain at a substantial discount to its peers.
With shares in the company trading at 9.7 times their expected earnings this year, they're also trading well below their 5-year historical multiple of 13.3 times forward earnings.
Looking elsewhere, Saga(LSE: SAGA) is another company to keep your eye on. Shares in the over-50s travel and insurance group have rebounded strongly in recent weeks as travel sales continue to offset much of the slack from its insurance business.
Despite intensifying competitive pressure in the home and motor insurance markets, the group is optimistic about its longer-term prospects -- so much so that the board raised its full-year dividend payout to 9.0p.
Saga has been undergoing a major shift in its business model. The company is moving away from riskier and more capital-intensive underwriting towards a 'pure' broking service, but the shift has not delivered the profit uplift expected by the company.
The transformation in its business model may still make sense for the group in the long term, as it frees up capital and enables the firm to focus on marketing its products. Saga has recently launched its membership scheme, which is showing good initial momentum in new business volumes.
This new membership scheme rewards customer loyalty and aims to reduce churn-rates and enhance cross-selling opportunities. It's part of Saga's attempts to reinvigorate the brand and make it more relevant in today's over-50s market.
It's still too early to say whether these initiatives will deliver a lasting improvement to its performance. Valuations remain undemanding, however, with shares trading at a forward P/E of 10.2.
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Jack Tang has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.