Imperial Tobacco Fined for Price-Fixing

We think Imperial has grounds for appeal and are not moving our fair estimate as the fine does not impact our valuation

Philip Gorham, CFA 16 April, 2010 | 6:47PM
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Imperial Tobacco has been fined £112 million by the consumer affairs watchdog, the Office of Fair Trading, for colluding with retailers to fix prices. We are maintaining our 2,211p fair value estimate because the fine represents only around 5% of Imperial's UK annual revenue and does not move the needle on our valuation.

The case related to promotional discounts that were offered to retailers under the agreement that the discounts would be passed on to consumers. Retailers such as Morrison Supermarkets were also fined, but the OFT's case against Tesco was dropped. Imperial will appeal, and although we think the firm does have grounds for appeal, given that the consumer ultimately received lower prices, the appeal could take years and, if unsuccessful, could result in a higher financial penalty. This ruling is a reminder of the litigation risk involved in investing in tobacco stocks, and we continue to recommend that investors look to firms with the strongest brands and highest yields, such as Philip Morris International and Altria, in order to maximise the return for bearing that risk.

Philip Gorham, CFA is a Morningstar equity analyst.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Imperial Brands PLC2,532.00 GBX0.92Rating

About Author

Philip Gorham, CFA  Philip Gorham, CFA, is an associate director of equity research for Morningstar.

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