FTSE 100 heavyweight Imperial Manufacturers (LSE: IMB) is up 72% from its 11 April 12-month traded low of £16.77.

That stated, this type of price acquire is not any purpose to keep away from shopping for the inventory, in my expertise. It could be that the agency is just value greater than it was earlier than. Or it might be that the market is simply taking part in catch-up with its true worth.

In truth, there is likely to be much more worth within the inventory than is mirrored even in its larger price.

What might the inventory’s truthful worth be?

The primary a part of my evaluation of any inventory price is taking a look at its key valuations in comparison with its friends.  

On the price-to-earnings ratio, Imperial Manufacturers presently trades at simply 8.6 — backside of its competitor group, which averages 20.4.

These companies embrace Altria at 8.7, Japan Tobacco at 15.9, British American Tobacco at 22.9, and Philip Morris at 34.1.

So, Imperial Manufacturers’ share price appears to be like very undervalued on this measure.

It additionally appears to be like a cut price on the price-to-sales ratio too, presently buying and selling at just one.2 in comparison with a peer common of 4.

To work out what all this implies in share price phrases, I ran a reduced money movement analysis. This highlights that the inventory is 59% undervalued at its present £28.79 price.

Due to this fact, the truthful worth of the shares is £70.22. Quite a lot of market forces might transfer it decrease or larger than that, in fact. However the DCF underlines to me the dimensions of the inventory’s under-pricing highlighted in its key valuations.

How do its development prospects look?

Imperial Manufacturers’ earnings elevated by a mean 10.4% yearly over the previous 5 years. This outpaced the tobacco and nicotine sector’s 7.5% common yearly development over the interval.

And it’s earnings development that drives an organization’s price and dividend over the long run.

For the following 5 years, at its 26 March Capital Markets Day, it forecast yearly low-single-digit tobacco web income development. Over the identical interval, it projected double-digit web income development for its Subsequent Era Merchandise, centred on nicotine substitutes.

A threat right here is that the extraordinary competitors on this enterprise reduces Imperial Manufacturers’ earnings. Nonetheless, the agency expects annual working revenue development of three%-5% and earnings per share development within the excessive single digits.

It additionally forecast free money movement of £2.2bn-£3bn every year over the five-year interval. Free money movement may also act as a significant driver of development.

Ongoing enhance to shareholder rewards

I believe the agency’s earnings and free money movement ought to allow its share price to steadily shut the hole to its truthful worth.

This course of must be additional helped by Imperial Manufacturers’ pledge to conduct huge share buybacks yearly to 2030. These are additionally broadly supportive of inventory price beneficial properties.

The agency moreover promised to proceed its progressive dividend coverage. These will develop yearly at a fee that accounts for underlying enterprise efficiency.

At the moment, the inventory yields 5.6%. Nonetheless, analysts forecast this can rise to six% in 2025, 6.2% in 2026 and 6.4% in 2027.

Given this and the share price implications of the brand new efficiency benchmarks, I believe it’s value my whereas shopping for extra of the inventory, which I’ll do shortly.