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It's Ups and Downs for Imperial Tobacco

Imperial Tobacco delivered a mixed bag of numbers on Tuesday, with sales rising and volumes falling.

Chief Executive Alison Cooper sounded an upbeat tone as the tobacco group posted a 3% rise in nine-month revenue.

It was a welcome return to form after first-quarter revenue was impacted by a trade ban in Syria, changes to the amount of stock it purchased in the U.S. and destocking in Ukraine to save on storage fees. Following that, first-half profit was hit by higher taxation and one-off items.

However, nine-month volumes of cigarettes and fine cut tobacco still fell 3%, even if the rate of decline was slower than in the first half.

Investec Securities analyst Martin Deboo said the numbers imply a volumes decline of 1% in the third-quarter, which is a "disappointment".

He added:

"There should have been decent share momentum out of the second quarter and the third quarter presented the weakest volume comparison of the year."

The shares ticked down in a modestly higher London market.

However, Mr. Deboo is retaining his "buy" rating as the broker expects a "strong" fourth quarter.

Panmure Gordon analyst Damian McNeela added: "Imperial remains well-positioned to deliver further volume growth from its key brands and should also benefit from positive pricing momentum in the fourth quarter."

Tobacco stocks are traditionally considered a safe haven for defensive investors, especially during economic downturns.

Even as smoking declines in the West amid pinched spending and increasing regulation, tobacco companies are driving purchases of luxury cuban cigars in emerging markets and phasing in price rises for their key cigarette brands to compensate for soft overall volumes.

Therefore, even with relatively volatile quarterly updates, Imperial's investor profile, alongside its diversified brand portfolio, is highly visible and therefore attractive.

But it's far from immune from external events.

The company said its nine-month volumes in Spain fell 11%, as cash-strapped smokers in the troubled economy cut back.

Spain, and indeed the whole of Europe, is an important market for Imperial, generating more than 40% of its sales, excluding the U.K.

So Imperial's focus will be on whether Europe's troubled outlook can improve.

Published: Tuesday, July 24, 2012

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