Here Comes Imperial Tobacco

On Wednesday, Nov. 5, Imperial Tobacco (NASDAQOTH: ITYBF) reported full-year results that  impressed the market and sent the stock up 3.3% during the first hour of trading. Investors were impressed because Imperial has been struggling to gain traction in the tobacco market for some time. 

In particular, Imperial's troubles lie mainly within Europe where a combination of the economic environment and higher excise taxes have pushed consumers away from Imperial's cigarette offerings and towards cheaper black-market products.

These troubles have kept investors away from Imperial. As a result, the company has underperformed almost all of its tobacco sector peers so far this year.

However, CEO of Imperial Tobacco Alison Cooper made some comments after the release that took me by surprise. These comments concerned the US tobacco market, which is generally considered to be in decline as consumers wise up to the fact that smoking is harmful. Nonetheless, during an interview with CNBC Alison Cooper stated that Imperial saw huge potential within the US market and the company was looking to drive sales growth within the region.

Imperial is already the fourth largest tobacco company within the US, after the acquisition of Commonwealth Brands back in 2007, and this gives Imperial a spring board for growth. What's more, according to Alison Cooper the company has put in place a new sales team and redeveloped its product offering ahead of a major sales drive .

Watch out!
The four largest tobacco companies operating in the United States' domestic tobacco market are Reynolds American, Altria (MO -0.37%), and Lorillard (LO.DL). Commonwealth Brands is the fourth, owned by Imperial.

Nonetheless, if we look at the sales figures for Reynolds American, Altria, and Lorillard we can see that, unlike the sales of the largest listed international tobacco company Philip Morris, sales actually remain relatively robust.

This is a trend that Imperial is seeking to capitalize on. The company is looking to refocus its efforts onto the US domestic market and domestic cigarette companies should be worried.

In particular, Imperial has a huge amount of firepower behind it. During fiscal 2013 Imperial reported revenue of more than £28 billion, or $45 billion, which is more than the revenue of Altria, Lorillard, and Reynolds combined.

Actually, $45 billion in sales would be approximately the same as two years worth of sales for Altria, or five-and-a-half years worth of Reynolds' sales. So, Imperial is a force to be reckoned with and the company's new attack on the US tobacco market could leave domestic cigarette companies fighting to maintain market share.

Slashing costs
Even though Altria's sales rose during the fiscal third quarter, the company has been forced to grapple with the general cigarette sales decline affecting the whole industry. In particular, for the first nine months of this year Altria's total volume of cigarettes sold declined 3.6%. The general decline has forced the company to restructure, and so far the company is in line to achieve $400 million in annualized cost savings as of this year.

The exception
Lorillard is the exception when it comes to declining sales and the need to cut costs. Indeed, during the first nine months of this year Lorillard's cigarette sales only declined a minuscule 0.1%, with the majority of this decline being felt within the value segment of the company's cigarette offering. In particular, during the nine months to September the company's value cigarette sales declined 5.1%, while sales of full price brands expanded 0.6%.

These rising sales volumes were not because more people started smoking but due to the fact that Lorillard's share of the menthol cigarette market has expanded nearly 1% so far this year. As Reynolds American is the only other major menthol player in the US market, we can assume that Lorillard is stealing some of its share from Reynolds .

Foolish summary
So overall, Imperial Tobacco's new sales drive into the US domestic cigarette market could prove troublesome for domestic companies Altria, Lorillard, and Reynolds American. That said, this drive into the United States could be highly beneficial for Imperial as the company struggles with falling tobacco sales within Europe.