Calculated Moves In NGP And Buybacks Propel Expanding Profit Margins And Shareholder Value

Key Takeaways

• Strategic focus and strong pricing in key markets enhance revenue growth and margins through brand and sales execution.
  
• Growth in NGP and share buybacks boost earnings, supporting long-term shareholder value and financial confidence.
  
• Persistent challenges in the U.S., high pricing in the U.K., and regulatory risks in Europe could hinder Imperial Brands' revenue growth and profit margins.

Catalysts

Manufactures, imports, markets, and sells tobacco and tobacco-related products in Europe, the Americas, Africa, Asia, and Australasia.

• The company's five-year plan is currently in an acceleration phase, with a strategic focus on increasing aggregate market share in five priority markets, supported by brand strengthening and improved sales execution, which is expected to enhance revenue growth and improve net margins.
  
• Strong pricing and a positive price/mix effect are contributing to significant net revenue growth in both Tobacco and next-generation products (NGP), which should continue to increase overall earnings and shareholder value.
  
• The NGP segment is experiencing broad-based growth in all three categories (vaping, heated products, oral nicotine pouches) and across all regions, leading to improved gross margins and reduced losses, potentially driving future revenue growth and profitability.
  
• The company's ongoing share buyback program has retired 11% of the share capital since 2022, significantly boosting earnings per share (EPS), and the aim of returning £10 billion to shareholders over five years is another driver of EPS growth.
  
• Disciplined capital allocation, including strong operational cash flow, strategic investments in NGP, and a progressive dividend policy, underpins the company’s confidence in continued financial delivery, likely enhancing revenue, operating profit, and long-term shareholder value.

Imperial Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Imperial Brands's revenue will decrease by -17.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.1% today to 21.1% in 3 years time.
• Analysts expect earnings to reach £2.2 billion (and earnings per share of £3.36) by about November 2027, down from £2.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £2.4 billion in earnings, and the most bearish expecting £1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.2x on those 2027 earnings, up from 8.4x today. This future PE is lower than the current PE for the GB Tobacco industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 8.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.8%, as per the Simply Wall St company report.

Imperial Brands Future Earnings Per Share Growth

Risks

• The U.S. has been more challenging in terms of market volumes, which means future revenue growth could be impacted if these challenges persist.
  
• In the U.K., higher pricing strategies could lead to market share loss, impacting revenues and potentially affecting profit margins if the strategy does not deliver long-term value as planned.
  
• Potential risks of regulatory changes, such as bans on disposable vape products in European markets, could threaten NGP revenue growth if illicit market share is removed or reduced.
  
• While NGP growth is promising, it remains a small fraction of total revenue, lower than competitors, indicating potential vulnerability to external market shifts affecting broader revenue growth.
  
• Foreign exchange translation is expected to be a 1% to 2% headwind to profit, which can negatively impact earnings if currency fluctuations are unfavorable.

Valuation

• The analysts have a consensus price target of £28.12 for Imperial Brands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £36.0, and the most bearish reporting a price target of just £21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £10.3 billion, earnings will come to £2.2 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of £26.35, the analyst's price target of £28.12 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.