How Imperial Tobacco Group PLC (IMT) Measures Up as a GARP Investment

LONDON — 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 PLC (LON:IMT) to see how it measures up.

What are Imperial Tobacco Group’s earnings expected to do?

Metric 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 PLC (LON:IMT) 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 PLC (LON:IMT)’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.

Does Imperial Tobacco Group provide decent value against its rivals?

Metric 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. Although Imperial Tobacco Group PLC (LON:IMT) 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 will 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 3.3 billion pounds. This in turn pushed total adjusted operating profit 5.1% lower, to 1.4 billion pounds.

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 300 million pounds in costs through to September 2018.

So even though Imperial Tobacco Group PLC (LON:IMT)’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.

The article How Imperial Tobacco Measures Up as a GARP Investment originally appeared on and is written by Royston Wild.

Royston Wild owns shares of Imperial Tobacco Group. The Motley Fool has no position in any of the stocks mentioned.

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